Executive Summary
Orezone Gold Corporation (“Orezone”) (TSX:ORE) (OTCQZ:ORZCF) is a company that has developed the Bomboré gold project in Burkina Faso, West Africa, which declared commercial production on 1 December 2022. It has, however, not come easy. Orezone’s involvement in the project dates back to before 2006, when it was earning into the project. After 2008, Bomboré was fully owned, and Orezone could declare in that year a decent size of mineral resource amounting to 2.7 million ounces (Moz”), albeit at a very low grade of 0.60 g/t Au.
The Bomboré project was obviously not an easy nut to crack as the company continued drilling and conducting economic assessments. Updated mineral resource estimates (“MRE”) were released almost on an annual basis until 2015, after which MRE and/or feasibility studies were released on an annual basis, culminating in the 2019 feasibility study (“FS”), which was the basis for the go-ahead decision to develop the mine. Crux Investor’s position is that, if a project suddenly proves feasible after many years of plodding along, be extra careful.
For this reason, a full review and valuation was undertaken by Crux Investor early in 2023, to verify whether Bomboré made the grade. The Analyst’s Notes published on 13 January 2023 raised several concerns, in particular relating to the MRE methodology and very low assumed operating cost rates. Crux Investor had benchmarked these rates against actual costs of other open pit operations in Burkina Faso and concluded that a 60% addition to the total operating cost would bring Bomboré in line. The conclusion of the report was that, at a diluted Enterprise Value of US$475 million, it was valued 28% higher than the NPV8 value without any mishaps and therefore offered limited upside.
An Analyst’s Notes dated 23 April 2024 reviewed how the company had fared compared to the plan. This showed that Crux Investor’s concern about the cost rate was fully warranted, and that there are indications the actual grade mined is lower than forecast.
On 24 November 2023, a definitive feasibility study (“DFS”) was published on the Phase II expansion for Bomboré. This study could draw on actual production and financial performance and should give a much more reliable picture of the project’s prospects. As the market had since January 2023 pushed down the share price substantially, despite a rising gold price, Orezone may well now be a good opportunity. This is the reason for this re-evaluation.
The latest MRE is deemed by Crux Investor an improvement over previous work, as it makes fewer assumptions that can be classified as leaps of faith. However, it is incomprehensible that the 2023 MRE has not tested the model against what has been mined since the start of production. This would have been the best validation of the estimation results. According to Orezone, reconciliation is carried out routinely, and the absence of these results in the technical report is concerning.
The reserve estimation also improves the 2019 study, as it uses a higher cut-off grade and applies much higher dilution rates, plus factors to reduce the grade due to artisanal mining of high-grade pockets. Whereas there has been a considerable decline of contained gold in the mineral resources, the gold in reserves has increased by 25%. This is explained by a much higher conversion rate of resources to reserves, 51% compared to 39% in 2019. Why the conversion is so much higher than before is not explained.
Mining involves much grade control with five material streams, the use of relatively small equipment, extracting the ore in a selective fashion to reduce dilution, and employing a contractor responsible for acquiring equipment. All these factors will push the mining cost rate up.
With actual plant performance now available, the risk relating to forecast metallurgical performance of treating Oxide material has diminished considerably. There is a clear relationship between recovery and feed grade, with a drop of 0.1 g/t Au in the feed reducing recovery by 1.8%. In light of this, the conclusion from the extensive test work on the Sulphide material is that there is no relationship between feed grade and recovery is surprising.
The Crux Investor cash flow model is based on the 2023 feasibility study but has raised the suggested capital expenditure for the plant expansion by 42% and increased total operating cost rates by 22% based on actual 2023 rates. The mining cost rate was adjusted US$0.50/t upwards to account for future drilling and blasting, and the 2023 Oxide processing cost was adjusted down by US$3.0/t for power now available from the national grid. In addition, Corporate Expenses of US$7.3 million per annum were included as per the actual 2023 expenses.
Using the spot gold price of US$2,390/oz, Crux Investor arrives at a net free cash flow of US$935 million, with an NPV8 of US$535 million, considering the 10% government share, withholding taxes on repatriation of profits, and corporate expenses. At the share price of C$0.81 on 91 April 2024, the diluted Enterprise Value of Orezone is US$321 million, which is almost 40% below the NPV8 value.
At the current very high gold price Orezone has become good value should this price become a long-term phenomenon. Bomboré is a marginal operation that has only survived its first 1½ years of production due to a much higher gold price than forecast in the 2019 FS. If it had not been for this, the much higher operational costs would have killed off the project. If you are a gold bull who believes the metal will keep its current value, Orezone provides a good upside.
There are however two risks that should be considered before investing:
- It is not evident to Crux Investor that the latest MRE is valid, something the company needs to substantiate by showing that the feed grade reconciles with the block model and by disclosing in its quarterly statements a mined grade that is in line with the planned mined grade.
- And then there is the problem of securing funding for Phase II Expansion for a project in a country that has allowed the deployment of the Africa Corps, de facto successors of the Wagner Group. One has to wonder how many Western financial institutions will be prepared to get involved in a country that has turned anti-Western.
Orezone is a case of high risk for a potential decent return.
Introduction
Orezone Gold Corporation (“Orezone”) (TSX:ORE) (OTCQZ:ORZCF) is a Canadian company that operates the Bomboré mine in Burkina Faso, West Africa. The company was the subject of an Analyst’s Notes on 13 January 2023, which raised some major concerns, and the company’s share price was deemed to provide little upside. On 23 April 2024 an Analyst’s Notes article was published reviewing how accurate Crux Investor advice had been for four companies, one of which was Orezone. The review focused on how the operational and financial performance of Orezone has been compared to the plan as per the feasibility study published in January 2020. In November 2023 a revised feasibility study was published that addressed some of Crux Investor’s concerns. This Crux Investor report reviews the updated plan and re-values Orezone to determine whether the company now constitutes good value after the drop in share price since January 2023. This report will repeat some of the background to allow the reader to assess the report as a stand-alone document.
The review of the operational and financial performance compared to the 2020 feasibility study forecast carried out for the abovementioned Analyst’s Notes published on 23 April 2024 concluded the following:
- Ore production exceeded the planned rate by almost 19%, but mine production was 7% down overall because of much lower waste stripping. Lower stripping could be planned, but also unplanned, with management not being able to properly distinguish between waste and ore, sending more waste for treatment than planned;
- The amount of material treated exceeded the plan by more than 10%, but the grade was almost 17% lower;
- The 2023 actual operating cost rate is almost exactly 60% higher, but the individual cost rates are even higher. That these much higher rates are not reflected in the overall cost rate is due to lower mining volumes and the higher treatment rate;
- Thanks to the actual gold price received exceeding forecast by 50%, revenue was 35% higher than forecast. Due to the much higher operating cost, off-site corporate cost, and ongoing exploration and evaluation costs being ignored in the feasibility study, cash flow generated from operations was 18% lower than forecast;
- However, the free cash flow was almost 90% lower than the forecast US$89 million because of much higher continued capital expenditure, and servicing of debt finance not modelled in the feasibility study.
Figure 1_1 shows Orezone's share price performance on the Toronto Stock Exchange since July 2018, the farthest back prices are available.
The graph shows that the price briefly rose after the Analyst’s Notes publication in January 2023, when the company reported good performance for the period ending December 2022. Since then, the price has dropped considerably, with the market obviously disappointed about continued poor/underperformance and possibly the increased political risk in Burkina Faso.
This note will investigate whether the share price drop has made Orezone an attractive investment opportunity based on the prospects painted in the 2023 Phase II Expansion DFS, and the current high gold price.
Historical Financial Performance
Table 2_1 gives the historical financial performance from 1 January 2010, the year when it raised substantial funding to advance Bomboré, until 31 December 2024.
Table 2_1 shows that:
- The company’s investments were initially very low, which is due to Orezone expensing exploration and evaluation costs, only to capitalise these when the project on which these expenses were incurred proved to be technically feasible and commercially viable. After the go-ahead decision, development costs were included under Investments;
- Between 1 January 2010 Orezone and 31 December 2022, just after the start of commercial production, Orezone had spent a total of US$324 million funding management, exploration activities and studies, and on investments. Net funding raised amounted to US$330 million, initially almost exclusively from equity placements until construction financing was arranged. Shareholders have funded the company until December 2023 by more than US$242 million; and
- It is noticeable that the cash balance has increased by only US$10.3 million during 2023, a year that should have been a banner year, allowing the company to generate funding for the planned Phase II expansion. The small increase is partially due to the repayment of US$29.3 million in debt, leaving US$95.5 million repayable on 31 December 2023.
Valuation of the Bomboré Project
Introduction
The technical information referred to in this report is from the NI.43-101 compliant technical report on the resource estimation by Roscoe Postle Associates Incorporated (“RPA”), the feasibility study dated 6 January 2020, and the DFS dated 24 November 2023 under the auspices of Lycopodium.
Crux Investor applauds Orezone for using different authors for the latest feasibility study. It was one of the concerns expressed in the January 2023 Analyst’s Notes that the company used the same agency for the studies, which is cost-efficient, but at the price for Orezone of nobody ever looking at the project with fresh views and ideas. Whereas the agencies remain the same, the personalities have changed at least.
Background to the Bomboré Project
The Bomboré project is located in central Burkina Faso, approximately 85 km east of the capital city of Quagadougo (Figure 3.2_1).
The project is easily accessible from Ouagadougou via the paved, national N4 highway.
The tenement covers an area of 12,963 hectares (“ha”) and consists of one Industrial Operating Permit (the Bomboré Mining Permit) of 2,887 ha, surrounded by four Mining Exploration Permits, being permit area Bomboré II of 1,265 ha, Bomboré III of 3,360 ha, Bomboré IV of 833 ha, and Bomboré IV of 4,618 ha (see outline and extent of permits in Figure 3.2_2).
Orezone has a beneficial 90% interest in the company holding the permits, with the Burkina Faso government holding the balance on a free-carried basis.
There are no royalty obligations to private third parties, but as of October 2023, the government is entitled to 6.5% net smelter return (“NSR”) when the gold price exceeds US$1,700/oz, increasing to 7.0% for spot prices exceeding US$2,000/oz. In addition, there is a contribution of 1% to a Local Development Fund.
Furthermore, in January 2024, the Burkina Faso government introduced a special levy of 2% on after-tax profits, effective beginning for the 2023 taxation year, to raise additional funds to support its efforts in improving national security.
Geology and Mineralisation
The project covers part of a northeast-southwest-trending greenstone belt extending 50 km from the southwest corner to the northeast (see Figure 3.3_1).
The permit area is underlain mainly by a metasedimentary flysch-type (= sediments deposited on the slopes of the continental shelf) sequence dominated by metasandstones with subordinate carbonaceous metapelites (= originally clay-rich) and polymictic metaconglomerates. The metasedimentary successions have been intruded by various types of igneous rocks.
Surface weathering has affected the rocks to an average depth of 35 m to 50 m, but can be as deep as 100 m, and as shallow as 5 m to 10 m. With no surface outcrop, exploration had to rely on geochemical soil sampling, geophysical surveys, and drilling, to clarify the geology and test the mineralisation.
Figure 3.3_1 shows the extent of the Bomboré shear zone (“BSZ”) within two interrupted lines in between which the mineralisation is present, with the resource shells shown as red outlines. The BSZ is a major 1-3-kilometre-wide structure and represents the dominant structural feature of the area. The BSZ is oriented 040° in the northern portion of the property and 340° in the southern portion of the property. The curvature of this shear zone is interpreted to be caused by the moulding of the greenstone belt to the late quartz-diorite intrusive that is located along the eastern margin of the property. The dip of the main lithological contacts in the north is approximately 65° towards the southeast, and in the south, approximately 55° towards the northeast. Within the shear zone, there are many indications of brittle-ductile deformation with folds, transposition, and an anastomosing pattern. From the discussion above, one can expect complex geology and deposit outlines.
The Bomboré gold mineralisation trend is defined by a gold-in-soil anomaly exceeding 0.1 g/t Au, as well as by the presence of numerous gold showings and orpaillage (artisanal miners) sites. The Bomboré anomaly measures 14 km in length, is several hundred metres in width, and occurs within the BSZ. Eleven separate auriferous zones have been delineated by drilling within the 14 km segment of the BSZ located within the project area. The gold deposits were discovered by tracing gold-in-soil anomalies to bedrock by drilling.
The gold mineralisation on the property is associated with arrays of structurally controlled quartz veins and veinlets, and associated silica, sulphide, and carbonate alteration developed within the BSZ. Most quartz veins are oriented sub-parallel to the foliation (= plane defined by with layering of minerals perpendicular to the main stress) and exhibit strong strain (= amount of deformation). The quartz veins and veinlets represent about 1% to 2% of the volume of the BSZ. The widths of the veins range from 2 cm to 1 m, with an average of 10 cm. The near-surface gold mineralisation with grades of up to 0.2 g/t Au is pervasive, regardless of quartz veining. In fresh rock, the gold mineralisation is associated with finely disseminated sulphides, predominantly pyrite. Most of the quartz vein material is barren.
When the gold mineralisation is predominantly associated with silica and iron carbonateit is typically free-milling. Gold mineralisation may, however, also be associated with disseminated sulphides (pyrite (FeS2), pyrrhotite (FeS), chalcopyrite (CuFeS2), and arsenopyrite (FeAsS)) in strongly deformed alteration zones. In this case, gold may be free milling, but can also be locked in the sulphide lattice structure and refractory (= not accessible for leaching by cyanide).
The wet palaeoclimate that preceded the current semi-arid climate in Burkina Faso has resulted in extensive surface oxidation of bedrock, and a deep weathering profile. Oxidised bedrock can occur up to a vertical depth of 100 m. Gold deposits span both the surface oxide zone and a deeper sulphide zone. In the oxide zone, gold typically occurs in a free milling form, but is grind sensitive in the sulphide zone.
At a threshold grade of approximately 0.15 g/t Au (Crux Investor comment: previously the threshold was given as 0.20 g/t Au), it is said that the gold mineralisation exhibits “reasonable continuity over a strike length of approximately 10 km”. At this threshold grade, the gold mineralisation forms more restricted corridors (500 m to 1,000 m in length and 10 m to 100 m in width) defining anastomosing patterns, parallel and slightly oblique to the general trend of the BSZ. These higher-grade corridors formed the basis for defining geostatistical domains within each litho-domain considered for mineral resource estimation.
Mineral Resources Estimation
The gold mineralisation has been modelled within seven zones (B1, B2, P11, Siga, S16, P17N, and P17) as 378 individual mineralised domains. The domains occur as sub‐parallel, tabular zones that gradually change in strike from north‐northwest, to northeast. Most of the mineralisation wireframes are interpreted to dip moderately to the east or southeast. The technical report does not discuss how these wireframes were generated, stating only that these were supplied by Orezone staff. Crux Investor considers it imprudent for the resource modeller to rely on the company to provide wireframes. He/she should generate these and only cross-check them against the company-provided ones.
Crux Investor records that Orezone has changed the denomination of certain zones and added two more since the previous MRE.
The approach to estimating resources has changed markedly from the 2017 MRE. Where the previous MRE distinguished seven weathering units, the 2023 MRE only used five: regolith at the surface, below which is the oxidised zone, then the transitional zone split in Upper and Lower, and finally fresh rock.
Where the 2017 MRE outlines low-grade domains using a threshold of 0.2 g/t Au over a minimum width of 3 m, this seems not to have been used in the 2023 MRE. The latest exercise uses a composite length of only 1 m for grade estimation. With the change in approach, it seems that the perceived relationship between mineralisation and lithology, something heavily criticised by Crux Investor as unproven, has been dropped. It is concerning, however, that wireframing seems to be purely based on connecting grade intercepts without any geological support. Such outlining always generates issues.
The most important change from the 2017 MRE is that the current study concedes that variography gave such poor results that ordinary kriging (“OK”), used in 2017, was not appropriate, and block grades have been estimated using Inverse Distance Cubed (“ID3”). As stated: “The Authors were unable to derive acceptable semi-variograms for the individual mineralization domains, which tended towards pure-nugget effect semi-variograms or very short range semi-variograms”. The reference to “pure nugget effect” should make one extra cautious about the results of the resource estimation.
The 2023 MRE’s tendency to greater selectivity is also evident in the choice of parent block size with dimensions of 6.25 m along strike (previously 12.5 m), 2 m across strike (previously 4 m), and 3 m height (previously 6 m).
The conceptual pit outlines use input parameters that yielded cut-off grades slightly above 0.25 g/t Au (previously 0.20 g/t Au) for free dig material and 0.45 g/t Au for material of Lower Transition zone and Fresh Rock. The increase in cut-off grade is despite assuming a much higher gold price of US$1,700/oz and reflects much more conservative operating cost assumptions.
Table 3.4_1 below shows the Mineral Resource statement, effective 28 March 2023 compared to the statement effective 5 January 2017.
The latest Measured and Indicated (“M&I”) resources contain 11% less gold than in 2017, despite the inclusion of new deposits. The drop is a reflection of resources having been mined, combined with an increase in cut-off grade. The higher cut-off grade resulted in a grade that is 13% higher than in 2017.
Not shown in the table are numbers for Inferred resources that amount to 60,000 oz in Oxide and 549,000 oz in Fresh Rock, both at roughly the same grade as for M&I resources.
The 2023 MRE presents no visual validation of the block models. This was supposedly carried out “visually by the inspection of successive vertical cross-section lines and plan views in order to confirm that the block models correctly reflect the distribution of high-grade and low-grade values”. It would have been good if the report had shown examples of close correlation. Instead, tables are included comparing the results for the mean of composite grades, OK estimated grade, nearest neighbour estimated grades, and ID3 estimated grades.
At least no longitudinal sections were presented as for the 2017 MRE onto which the individual parallel domains were projected to validate block grades with composite grades. Crux Investor was very critical of this in its Analyst’s Notes as being inappropriate.
Crux Investor deems the latest MRE a big improvement over the 2017 exercise, as it makes fewer assumptions that can be classified as leaps of faith. However, it is incomprehensible that the 2023 MRE has not tested the model against what has been mined since the start of production. This would have been the best validation of the MRE. The absence of such a reconciliation, something that mine management does as a matter of course during mining, makes one wonder whether the results were not good enough to be presented. The practice of reconciliation is confirmed on page 16.16 of the technical report, which states: “reconciliation between the resource block model, dig packets and plant results are performed monthly”.
Mineral Reserves Estimation
For the reserve estimation, pits were designed in six block areas (previously five), which are divided by river beds (indicated in light blue in Figure 3.5_1) or where there is a deposit not connected to the main body (i.e. P17 Block at the extreme right).
After using a very small block size for the MRE, the model had to be re-blocked back to a larger 12.5 m x 4 m x 6 m size “to account for dilution and losses”. Dilution rates vary between 15% and 30%. For the three most important reserve areas in order of gold content, the estimated dilutions were 23% (Block 2), 16% (Block 4), and 22% (Block 1). These dilution rates are much higher than suggested in 2019 when they varied between 1.2% and 13.7%. Ore losses for the three main reserve areas are respectively 25%, 17% and 19%.
These are substantial numbers and probably reflect the narrow nature of the individual domains.
Mining in the flood plains needs to be planned carefully to be completed in one dry season (i.e. pits in the Nobsin River), the creation of 50 m wide buffers to protect main pits, creation of upstream dams and downstream and river diversions.
For the pit optimisation, both free dig and hard rock material were included, with inputs varied depending on the proposed mining method. The input parameters used a mining cost rate of US$2.45/t for free-dig mining, adding US$0.40/t for drilling and blasting of fresh rock. With the benefit of having actual contractor rates the provisions are much more realistic than the US$1.30/t used in 2019 for free dig and US$1.75/t for fresh rock. Similarly, the processing cost rates of US$7.50/t for oxide material and US$15.25/t for fresh material are much more realistic than the US$5.30/t used in 2019 for oxide and US$11.10/t for sulphide.
The net effect of the higher gold price, but also higher operating cost, is that the calculated cut-off grades remained essentially the same at 0.3 g/t Au for oxide and transition material to 0.5 g/t Au for sulphide material.
The presence of high-water saturation zones has a large impact on the pit slopes in such areas. 33% saturation of saprolite results in overall slope angles as low as 24° by the time the pit reaches a depth of 100 m and for 10% saturation as low as 32°.
The pit design incorporated more than 76 separate pits varying from 18 m to 180 m depth along 14 km strike and 3 km wide.
Table 3.5_1 contains the mineral reserve statements, comparing the 28 March 2023 numbers to the 26 June 2019 reserves.
Total gold in reserves has increased by 25% amounting to 2.3 Moz at an average grade of 0.75 g/t Au. This is somewhat unexpected considering a decrease in gold in mineral resources. The explanation is the much higher overall conversion rate of 51% compared to 36% in 2019. Why the conversion is so much higher than before is not explained.
Whereas the 2019 reserves had an average grade of 17% higher than the M&I resources grade, the 2023 reserves have a slightly lower grade than mineral resources, which is much more reasonable considering the effect of dilution. The 2023 MRE also applies a factor of generally between 0.85 and 0.95 (for P17 a factor of 0.66 and for P16 0.50 was used!) to account for artisanal activity having removed pockets of high-grade gold.
Associated with the reserves is 187.6 Mt waste for a strip ratio of 1.96.
Mining
The Bomboré mine has been planned as a conventional open pit operation using contract mining. The oxide material can be readily excavated in situ (free‐dig material). The sulphides include the Lower Transition and Fresh Rock weathering units, which will require a varying degree of drill and blast before being loaded onto trucks. The pit design is based on 6 m benches for Oxides and double stack 2 x 6 m bench height for Fresh Rock. Ore will be excavated in 3 m flitches to increase mining selectivity. In general, a minimum mining width of 4 m is observed during the dig packet creation. According to the technical report: “packet grades are estimated using the OK gold grade estimation from the bench samples within the packet polygon”. The inconsistency between rejecting OK for resource estimation but using it for mine planning is not explained.
Mining of Oxides is currently undertaken with diesel hydraulic excavators equipped with 3 m3 to 5 m3 buckets. Similar shovels are planned for mining the Fresh Rock.
The haulage requirements for Oxide and Fresh Rock material have been estimated based on rigid frame highway trucks with 26 t payload as currently deployed in the mining operations. Using such trucks in preference to articulated dump trucks is cheaper, but gives less flexibility and productivity during the wet season and requires proper cladding of the haul roads.
Mining, backfilling, and rehabilitation of the pits within “Restricted Zones” (where water saturation is expected at 33%) is to be fully completed prior to re‐establishing river flow by the start of the next wet season.
Run of mine (“ROM”) ore will be hauled to the process plants and low-grade and medium-grade material hauled to the ore stockpiles. Waste will be hauled to waste dumps with approximately 25% used for site and Tailings Storage Facility (“TSF”) construction. Managing the five material streams will require extensive grade control measures.
The above description shows that mining will not be straightforward, requiring many small pits, excavation of relatively small heights, using relatively small mining equipment to minimise dilution, requiring many supporting activities such as grade control and construction and activities to protect pits from water ingress and cladding of haul roads. This should be reflected in the mining cost rate and sustaining capital expenditure.
Metallurgy and Processing
The oxide plant can boast a production performance of more than one year and has proven to perform as forecast with recoveries exceeding 90% at head grades above 0.80 g/t Au. Moreover, the plant has proven to be able to treat 0.7 Mtpa above its nameplate capacity of 5.2 Mtpa. This aspect of the business plan can therefore be considered low risk and will not receive further attention.
Additional test work on sulphide material was carried out in 2023 to support the updated feasibility study. Crux Investor records that the gold grade of the samples and composites used are generally representative of the reserve grade. The results confirmed previous work with one major difference. Whereas the 2019 feasibility study had gold recovery increasing with grade, the 2023 test work results found no obvious relationship between grade and recovery and suggested a fixed gold recovery rate for the various ore types: Oxide (91.8%), Upper Transitional (89%), Lower Transition (86%), and Fresh (81.7%).
However, actual recovery of treating Oxide shows a clear relationship as is illustrated in Figure 3.7_1 below.
The diagram shows that at least for Oxide there is a definite and strong relationship between grade and recovery: for every 0.1 g/t Au drop in feed grade, the recovery can be expected to drop by 1.8 percentage points.
The Sulphide Plant differs from the Oxide Plant by having a crushing circuit and using a semi-autogenous (“SAG”) mill (the Oxide Plant uses a ball mill) to produce a grind size of 80% passing (“P80”) 75 μm (Oxide Plant P80 of 125 μm). After pre-oxidation gold is subjected to carbon-in-leach (“CIL”). Liquid cyanide is pumped to the leach circuit to leach the gold. Activated carbon is used to adsorb the gold out of the slurry and loaded carbon is acid-washed and pressure-stripped in a Zadra elution circuit. The existing carbon regeneration kiln will reactivate the carbon, the existing gold room will recover gold in two new electrowinning cells and the existing furnace will produce doré bullion bars.
The Sulphide Plant will be designed for a 4.4 Mtpa throughput.
Economic Evaluation
Economic Assumptions
The spot price on 19 April 2024 of US$2,390/oz Au was used as the base case gold price for the Crux Investor valuation. In addition, the feasibility study price of US$1,750/oz was used together with all other feasibility study input parameters to check whether the Crux Investor tax model is valid.
Production Schedule
Figure 3.8.2_1 shows graphically annual mine production.
According to the technical report, for the production schedule, pits were sequenced in order of value within assorted constraints such as wet seasons, access, TSF construction, and plant ramp-up.
Production for 2023 includes only nine months as of 1 April, mostly oxide ore. The little sulphide ore that is mined will be sent to the stockpile. The sharp rise in overall mine production in 2025 reflects the start of sulphide ore treatment requiring substantial pre-stripping of waste.
Figure 3.8.2_2 shows the plant feed over time, as of 1 April 2023. Through stockpiling lower-grade material with a grade of approx. 0.3 g/t Au, the planned feed grade in the early years is higher. Processing of sulphide and lower transitional material is planned to commence in 2025, which will benefit the overall grade just as the oxide material grade is dropping.
Over the Life of Mine (“LOM”) the amount of feed to the Oxide Plant is kept constant through reclamation of stockpiled ore. Crux Investor notices that the schedule optimistically assumes that the operation will manage to draw the highest grade first. At the end of the LOM low-grade, stockpiled sulphide material will be fed to complement dropping mine production. However, Crux Investor’s modelling shows that approx. 5,560 oz less gold is treated from stockpile withdrawals than stacked.
Capital Expenditure
Table 3.8.3_1 shows the forecast capital expenditure relating to Phase II, the so-called Growth Capital Expenditure, and Sustaining Capital Expenditure over the LOM.
The capital expenditure for mining is low because the mining contractor has the obligation to refurbish and replace mining equipment.
The provision for the stand-alone new plant seems very low, at less than US$460/monthly tonne capacity, even when the costs of all other supporting activities are included. Crux Investor has raised the cost by 42% to reach US$650/t monthly capacity, which is still optimistically low.
RAP in the table refers to the Resettlement Action Plan which involves the construction of three new resettlement communities under phases 2 & 3 and another under phase 4. Why it is classified as “growth” is unclear as it is incurred to extend the LOM and should be seen as in support of sustaining operations.
Sustaining capital costs include ongoing TSF raises, haul road extensions, grade control drills, and mine dewatering and surface water management equipment.
The closure and rehabilitation activities are expected to absorb US$19.1 million, but the study assumes that US$9.9 million will be received for the sale of equipment, which is an uncertain and risky assumption.
Operating Cost Estimate
In the previous Analyst’s Notes on Orezone, Crux Investor heavily criticised the operating costs rates used as being far too low. A benchmarking exercise using similar mining operations in Burkina Faso supported an increase of 60% in total operating costs. Actual operating costs during 2023 proved to be 59% higher than forecast, validating Crux Investor’s concerns.
With the benefit of knowing the early 2023 operating cost, the 2023 feasibility study has used much more realistic rates as is shown in Table 3.8.4_1. However, these are still low compared to actual 2023 operating cost rates.
Crux Investor has used a rate of US$3.50/t mined over the LOM to recognise the fact that in the future drilling and blasting will be required.
In 2024 the mine will be fully serviced by grid power, which according to management is expected to drop power costs by US$3.0/t treated. Considering that actual oxide processing was US$10.14/t during 2023, compared to the forecast of US$4.09 + US$0.62 = US$5.71/t, the suggested rate of US$5.73 + US$0.37 = US$6.10 was raised by US$5.71 – US$3.0 power saving = US$8.81/t oxide ore treated.
Crux Investor adopted the feasibility study rate of US$13.38 + US$0.37 = US$13.75/t, assuming that the power cost savings had already been factored in.
The feasibility study assumed General and Administrative (“G&A”) expenses of US$19.8 million for 2024 increasing to US$22.2 million after the Phase II expansion is complete. These provisions look low compared to the actual 2023 expenditure of US$22.7 million. Crux Investor has assumed US$22.7 million before expansion and US$27.7 million thereafter.
The valuation has included US$7.3 million for Corporate Expenses, the amount incurred in 2023, ignored in the feasibility study.
Working Capital
As the mine is in production, this is irrelevant and is considered when calculating the Enterprise Value in Section 4.1 below.
Royalties and Taxes
As was pointed out in Section 3.2 of this report, the sliding scale royalty to the government is effectively 7% for a gold price exceeding US$2,000/oz, to which must be added another percentage point for contributions to the local development fund.
As is standard with technical reports, the discussion on taxation is almost non-existent. The corporate tax rate is 27.5%, but no information is given about amortisation and depreciation of capital expenditure. Crux Investor has allowed for these based on the unit-of-production method reducing the book value to nil by the end of LOM. On 31 December 2023, the carrying number of historical investments was US$193.2 million.
The technical report gives no information on the tax rate on expatriation of dividends, but according to an article on the internet (https://www.trade.gov/country-commercial-guides/burkina-faso-market-opportunities) dated 30 November 2022, this is 12.5%.
Financing
The government has a 10% free carried interest.
The operation is subject to servicing and repayment of several loan facilities. As these are generally of short to medium duration, Crux Investor has not modelled servicing and repayment, and will account for these obligations under the Enterprise Value of Orezone. This introduces a small distortion, as cash flow shared with the government is after debt servicing arrangements.
There is a silver stream arrangement, but this is ignored by Crux Investor as being negligible, as silver revenue were ignored in the model.
Results
Table 3.8.8_1 shows the forecast financial performance over the LOM, both as per the feasibility study and per this valuation. The feasibility study case has been modelled to check the tax model against what the feasibility study gives for total taxes. The tax model seems accurate as Crux Investor taxes are only 1.2% higher.
The reader should note that the feasibility study numbers are from 1 March 2023, and the Crux Investor valuation numbers are from 1 January 2024.
The after-tax cash flow of the feasibility study is US$32 million higher than calculated by Crux Investor. This is because the US$31 million realisation of working capital assumed by Orezone was ignored. Orezone currently has negative working capital.
Despite the much higher operating cost provided in the Crux Investor valuation, the operating cash flow is almost 44% higher due to a gold price that is 37% higher at US$2,390/oz. The cash margin is a decent 44%, much affected by the government taking 8% of revenue. The reduction in “growth and Sustaining” capital expenditure (refer to the highlighted cell in Table 3.8.8_1) is due to amounts incurred in 2023 that are not accounted for in Crux Investor cash flow as of 1 January 2024.
The Crux Investor valuation takes account of many cash outflows ignored by the feasibility study: the 10% government share; withholding taxes on the repatriation of profits; and corporate overheads. These items together reduce the net free cash flow by US$362 million.
Table 3.8.8_2 shows the sensitivity of the net present values (“NPV’s”) for various discount rates to the main input parameters.
After substantially adjusting the operating cost there is little risk that this metric will fall short. The major remaining risk associated with the project is the feed grade having been overestimated. The gold price is a rough proxy for this as both price and grade will affect the revenue. For every percentage point variance in grade, the NPV8 would vary by almost US$15 million. A 34% shortfall (i.e. a LOM grade of 0.49 g/t Au) would wipe out the NPV8.
Valuation of Orezone Gold
The Enterprise Value of Orezone Gold on 19 April 2024
At the share price of C$0.81 on 19 April 2024, the market capitalisation of Orezone is C$298 million, or US$216 million.
At the end of December 2023, the company had 20.3 million options outstanding, of which an estimated 14.1 million are in the money. On that date 2.1 million Restricted Share Units were outstanding.
On 31 December 2023, the net current assets were negative US$30.5 million, and loans amounted to US$72.4 million.
Based on the above, Orezone's diluted Enterprise Value is C$443 million, equivalent to US$322 million, as derived in Table 4.1_1.
The diluted Enterprise Value of US$322 million is almost 40% lower than the NPV8 value calculated by Crux Investor. Considering the 90% interest in Bomboré, it puts a value of US$155 on each ounce in reserves.
Corporate Cash Flow
Figure 4.2_1 shows the forecast cash flow receivable in Canada after deducting the Burkino Faso government’s share, paying taxes on the repatriation of profits, and covering corporate expenses.
The above picture is flattering, as Crux Investor did not model debt servicing and repayment, which stood on 31 December 2023 at US$92.6 million including a US$20.2 million short-term portion.
The loans include a Convertible Note Facility currently amounting to US$31.6 million, which may be serviced up to 75% by issuing shares to pay interest. The holder may elect to convert the principal at any time for shares, but this is unattractive to the issuer of the facility should the share price drop below US$1.08 (equivalent to C$1.49).
The full repayment is due before September 2026 (October 2026 for the Convertible Note Facility). Theoretically, the company would generate more than sufficient funds in 2026, but this is subject to the completion of Phase II expansion, which requires substantial investments in 2024 and 2025, much more than the current cash balance. Orezone will have to carry out a major equity raise or enter into additional loan agreements. The Management Discussion and Analysis (“MDA”) report for the year ending 31 December 2023 mentions: “the Company is in the early engineering stage of the Phase II hard rock expansion as contemplated in the 2023 FS. This expansion is planned to be fully financed through operating cashflows and additional senior debt from Coris Bank. Discussions with Coris Bank are ongoing.”
As the decision has been pushed out to later in 2024, it will be impossible to achieve the production profile in the 2023 feasibility study with feed to the Sulphide plant in 2025.
Even without the current portion of debt, the net current asset balance is negative by more than US$10 million. Thus, Orezone's balance sheet cannot be classified as robust.
Executive Summary
Orezone Gold Corporation (“Orezone”) (TSX:ORE) (OTCQZ:ORZCF) is a company that has developed the Bomboré gold project in Burkina Faso, West Africa, which declared commercial production on 1 December 2022. It has, however, not come easy. Orezone’s involvement in the project dates back to before 2006, when it was earning into the project. After 2008, Bomboré was fully owned, and Orezone could declare in that year a decent size of mineral resource amounting to 2.7 million ounces (Moz”), albeit at a very low grade of 0.60 g/t Au.
The Bomboré project was obviously not an easy nut to crack as the company continued drilling and conducting economic assessments. Updated mineral resource estimates (“MRE”) were released almost on an annual basis until 2015, after which MRE and/or feasibility studies were released on an annual basis, culminating in the 2019 feasibility study (“FS”), which was the basis for the go-ahead decision to develop the mine. Crux Investor’s position is that, if a project suddenly proves feasible after many years of plodding along, be extra careful.
For this reason, a full review and valuation was undertaken by Crux Investor early in 2023, to verify whether Bomboré made the grade. The Analyst’s Notes published on 13 January 2023 raised several concerns, in particular relating to the MRE methodology and very low assumed operating cost rates. Crux Investor had benchmarked these rates against actual costs of other open pit operations in Burkina Faso and concluded that a 60% addition to the total operating cost would bring Bomboré in line. The conclusion of the report was that, at a diluted Enterprise Value of US$475 million, it was valued 28% higher than the NPV8 value without any mishaps and therefore offered limited upside.
An Analyst’s Notes dated 23 April 2024 reviewed how the company had fared compared to the plan. This showed that Crux Investor’s concern about the cost rate was fully warranted, and that there are indications the actual grade mined is lower than forecast.
On 24 November 2023, a definitive feasibility study (“DFS”) was published on the Phase II expansion for Bomboré. This study could draw on actual production and financial performance and should give a much more reliable picture of the project’s prospects. As the market had since January 2023 pushed down the share price substantially, despite a rising gold price, Orezone may well now be a good opportunity. This is the reason for this re-evaluation.
The latest MRE is deemed by Crux Investor an improvement over previous work, as it makes fewer assumptions that can be classified as leaps of faith. However, it is incomprehensible that the 2023 MRE has not tested the model against what has been mined since the start of production. This would have been the best validation of the estimation results. According to Orezone, reconciliation is carried out routinely, and the absence of these results in the technical report is concerning.
The reserve estimation also improves the 2019 study, as it uses a higher cut-off grade and applies much higher dilution rates, plus factors to reduce the grade due to artisanal mining of high-grade pockets. Whereas there has been a considerable decline of contained gold in the mineral resources, the gold in reserves has increased by 25%. This is explained by a much higher conversion rate of resources to reserves, 51% compared to 39% in 2019. Why the conversion is so much higher than before is not explained.
Mining involves much grade control with five material streams, the use of relatively small equipment, extracting the ore in a selective fashion to reduce dilution, and employing a contractor responsible for acquiring equipment. All these factors will push the mining cost rate up.
With actual plant performance now available, the risk relating to forecast metallurgical performance of treating Oxide material has diminished considerably. There is a clear relationship between recovery and feed grade, with a drop of 0.1 g/t Au in the feed reducing recovery by 1.8%. In light of this, the conclusion from the extensive test work on the Sulphide material is that there is no relationship between feed grade and recovery is surprising.
The Crux Investor cash flow model is based on the 2023 feasibility study but has raised the suggested capital expenditure for the plant expansion by 42% and increased total operating cost rates by 22% based on actual 2023 rates. The mining cost rate was adjusted US$0.50/t upwards to account for future drilling and blasting, and the 2023 Oxide processing cost was adjusted down by US$3.0/t for power now available from the national grid. In addition, Corporate Expenses of US$7.3 million per annum were included as per the actual 2023 expenses.
Using the spot gold price of US$2,390/oz, Crux Investor arrives at a net free cash flow of US$935 million, with an NPV8 of US$535 million, considering the 10% government share, withholding taxes on repatriation of profits, and corporate expenses. At the share price of C$0.81 on 91 April 2024, the diluted Enterprise Value of Orezone is US$321 million, which is almost 40% below the NPV8 value.
At the current very high gold price Orezone has become good value should this price become a long-term phenomenon. Bomboré is a marginal operation that has only survived its first 1½ years of production due to a much higher gold price than forecast in the 2019 FS. If it had not been for this, the much higher operational costs would have killed off the project. If you are a gold bull who believes the metal will keep its current value, Orezone provides a good upside.
There are however two risks that should be considered before investing:
- It is not evident to Crux Investor that the latest MRE is valid, something the company needs to substantiate by showing that the feed grade reconciles with the block model and by disclosing in its quarterly statements a mined grade that is in line with the planned mined grade.
- And then there is the problem of securing funding for Phase II Expansion for a project in a country that has allowed the deployment of the Africa Corps, de facto successors of the Wagner Group. One has to wonder how many Western financial institutions will be prepared to get involved in a country that has turned anti-Western.
Orezone is a case of high risk for a potential decent return.
Introduction
Orezone Gold Corporation (“Orezone”) (TSX:ORE) (OTCQZ:ORZCF) is a Canadian company that operates the Bomboré mine in Burkina Faso, West Africa. The company was the subject of an Analyst’s Notes on 13 January 2023, which raised some major concerns, and the company’s share price was deemed to provide little upside. On 23 April 2024 an Analyst’s Notes article was published reviewing how accurate Crux Investor advice had been for four companies, one of which was Orezone. The review focused on how the operational and financial performance of Orezone has been compared to the plan as per the feasibility study published in January 2020. In November 2023 a revised feasibility study was published that addressed some of Crux Investor’s concerns. This Crux Investor report reviews the updated plan and re-values Orezone to determine whether the company now constitutes good value after the drop in share price since January 2023. This report will repeat some of the background to allow the reader to assess the report as a stand-alone document.
The review of the operational and financial performance compared to the 2020 feasibility study forecast carried out for the abovementioned Analyst’s Notes published on 23 April 2024 concluded the following:
- Ore production exceeded the planned rate by almost 19%, but mine production was 7% down overall because of much lower waste stripping. Lower stripping could be planned, but also unplanned, with management not being able to properly distinguish between waste and ore, sending more waste for treatment than planned;
- The amount of material treated exceeded the plan by more than 10%, but the grade was almost 17% lower;
- The 2023 actual operating cost rate is almost exactly 60% higher, but the individual cost rates are even higher. That these much higher rates are not reflected in the overall cost rate is due to lower mining volumes and the higher treatment rate;
- Thanks to the actual gold price received exceeding forecast by 50%, revenue was 35% higher than forecast. Due to the much higher operating cost, off-site corporate cost, and ongoing exploration and evaluation costs being ignored in the feasibility study, cash flow generated from operations was 18% lower than forecast;
- However, the free cash flow was almost 90% lower than the forecast US$89 million because of much higher continued capital expenditure, and servicing of debt finance not modelled in the feasibility study.
Figure 1_1 shows Orezone's share price performance on the Toronto Stock Exchange since July 2018, the farthest back prices are available.
The graph shows that the price briefly rose after the Analyst’s Notes publication in January 2023, when the company reported good performance for the period ending December 2022. Since then, the price has dropped considerably, with the market obviously disappointed about continued poor/underperformance and possibly the increased political risk in Burkina Faso.
This note will investigate whether the share price drop has made Orezone an attractive investment opportunity based on the prospects painted in the 2023 Phase II Expansion DFS, and the current high gold price.
Historical Financial Performance
Table 2_1 gives the historical financial performance from 1 January 2010, the year when it raised substantial funding to advance Bomboré, until 31 December 2024.
Table 2_1 shows that:
- The company’s investments were initially very low, which is due to Orezone expensing exploration and evaluation costs, only to capitalise these when the project on which these expenses were incurred proved to be technically feasible and commercially viable. After the go-ahead decision, development costs were included under Investments;
- Between 1 January 2010 Orezone and 31 December 2022, just after the start of commercial production, Orezone had spent a total of US$324 million funding management, exploration activities and studies, and on investments. Net funding raised amounted to US$330 million, initially almost exclusively from equity placements until construction financing was arranged. Shareholders have funded the company until December 2023 by more than US$242 million; and
- It is noticeable that the cash balance has increased by only US$10.3 million during 2023, a year that should have been a banner year, allowing the company to generate funding for the planned Phase II expansion. The small increase is partially due to the repayment of US$29.3 million in debt, leaving US$95.5 million repayable on 31 December 2023.
Valuation of the Bomboré Project
Introduction
The technical information referred to in this report is from the NI.43-101 compliant technical report on the resource estimation by Roscoe Postle Associates Incorporated (“RPA”), the feasibility study dated 6 January 2020, and the DFS dated 24 November 2023 under the auspices of Lycopodium.
Crux Investor applauds Orezone for using different authors for the latest feasibility study. It was one of the concerns expressed in the January 2023 Analyst’s Notes that the company used the same agency for the studies, which is cost-efficient, but at the price for Orezone of nobody ever looking at the project with fresh views and ideas. Whereas the agencies remain the same, the personalities have changed at least.
Background to the Bomboré Project
The Bomboré project is located in central Burkina Faso, approximately 85 km east of the capital city of Quagadougo (Figure 3.2_1).
The project is easily accessible from Ouagadougou via the paved, national N4 highway.
The tenement covers an area of 12,963 hectares (“ha”) and consists of one Industrial Operating Permit (the Bomboré Mining Permit) of 2,887 ha, surrounded by four Mining Exploration Permits, being permit area Bomboré II of 1,265 ha, Bomboré III of 3,360 ha, Bomboré IV of 833 ha, and Bomboré IV of 4,618 ha (see outline and extent of permits in Figure 3.2_2).
Orezone has a beneficial 90% interest in the company holding the permits, with the Burkina Faso government holding the balance on a free-carried basis.
There are no royalty obligations to private third parties, but as of October 2023, the government is entitled to 6.5% net smelter return (“NSR”) when the gold price exceeds US$1,700/oz, increasing to 7.0% for spot prices exceeding US$2,000/oz. In addition, there is a contribution of 1% to a Local Development Fund.
Furthermore, in January 2024, the Burkina Faso government introduced a special levy of 2% on after-tax profits, effective beginning for the 2023 taxation year, to raise additional funds to support its efforts in improving national security.
Geology and Mineralisation
The project covers part of a northeast-southwest-trending greenstone belt extending 50 km from the southwest corner to the northeast (see Figure 3.3_1).
The permit area is underlain mainly by a metasedimentary flysch-type (= sediments deposited on the slopes of the continental shelf) sequence dominated by metasandstones with subordinate carbonaceous metapelites (= originally clay-rich) and polymictic metaconglomerates. The metasedimentary successions have been intruded by various types of igneous rocks.
Surface weathering has affected the rocks to an average depth of 35 m to 50 m, but can be as deep as 100 m, and as shallow as 5 m to 10 m. With no surface outcrop, exploration had to rely on geochemical soil sampling, geophysical surveys, and drilling, to clarify the geology and test the mineralisation.
Figure 3.3_1 shows the extent of the Bomboré shear zone (“BSZ”) within two interrupted lines in between which the mineralisation is present, with the resource shells shown as red outlines. The BSZ is a major 1-3-kilometre-wide structure and represents the dominant structural feature of the area. The BSZ is oriented 040° in the northern portion of the property and 340° in the southern portion of the property. The curvature of this shear zone is interpreted to be caused by the moulding of the greenstone belt to the late quartz-diorite intrusive that is located along the eastern margin of the property. The dip of the main lithological contacts in the north is approximately 65° towards the southeast, and in the south, approximately 55° towards the northeast. Within the shear zone, there are many indications of brittle-ductile deformation with folds, transposition, and an anastomosing pattern. From the discussion above, one can expect complex geology and deposit outlines.
The Bomboré gold mineralisation trend is defined by a gold-in-soil anomaly exceeding 0.1 g/t Au, as well as by the presence of numerous gold showings and orpaillage (artisanal miners) sites. The Bomboré anomaly measures 14 km in length, is several hundred metres in width, and occurs within the BSZ. Eleven separate auriferous zones have been delineated by drilling within the 14 km segment of the BSZ located within the project area. The gold deposits were discovered by tracing gold-in-soil anomalies to bedrock by drilling.
The gold mineralisation on the property is associated with arrays of structurally controlled quartz veins and veinlets, and associated silica, sulphide, and carbonate alteration developed within the BSZ. Most quartz veins are oriented sub-parallel to the foliation (= plane defined by with layering of minerals perpendicular to the main stress) and exhibit strong strain (= amount of deformation). The quartz veins and veinlets represent about 1% to 2% of the volume of the BSZ. The widths of the veins range from 2 cm to 1 m, with an average of 10 cm. The near-surface gold mineralisation with grades of up to 0.2 g/t Au is pervasive, regardless of quartz veining. In fresh rock, the gold mineralisation is associated with finely disseminated sulphides, predominantly pyrite. Most of the quartz vein material is barren.
When the gold mineralisation is predominantly associated with silica and iron carbonateit is typically free-milling. Gold mineralisation may, however, also be associated with disseminated sulphides (pyrite (FeS2), pyrrhotite (FeS), chalcopyrite (CuFeS2), and arsenopyrite (FeAsS)) in strongly deformed alteration zones. In this case, gold may be free milling, but can also be locked in the sulphide lattice structure and refractory (= not accessible for leaching by cyanide).
The wet palaeoclimate that preceded the current semi-arid climate in Burkina Faso has resulted in extensive surface oxidation of bedrock, and a deep weathering profile. Oxidised bedrock can occur up to a vertical depth of 100 m. Gold deposits span both the surface oxide zone and a deeper sulphide zone. In the oxide zone, gold typically occurs in a free milling form, but is grind sensitive in the sulphide zone.
At a threshold grade of approximately 0.15 g/t Au (Crux Investor comment: previously the threshold was given as 0.20 g/t Au), it is said that the gold mineralisation exhibits “reasonable continuity over a strike length of approximately 10 km”. At this threshold grade, the gold mineralisation forms more restricted corridors (500 m to 1,000 m in length and 10 m to 100 m in width) defining anastomosing patterns, parallel and slightly oblique to the general trend of the BSZ. These higher-grade corridors formed the basis for defining geostatistical domains within each litho-domain considered for mineral resource estimation.
Mineral Resources Estimation
The gold mineralisation has been modelled within seven zones (B1, B2, P11, Siga, S16, P17N, and P17) as 378 individual mineralised domains. The domains occur as sub‐parallel, tabular zones that gradually change in strike from north‐northwest, to northeast. Most of the mineralisation wireframes are interpreted to dip moderately to the east or southeast. The technical report does not discuss how these wireframes were generated, stating only that these were supplied by Orezone staff. Crux Investor considers it imprudent for the resource modeller to rely on the company to provide wireframes. He/she should generate these and only cross-check them against the company-provided ones.
Crux Investor records that Orezone has changed the denomination of certain zones and added two more since the previous MRE.
The approach to estimating resources has changed markedly from the 2017 MRE. Where the previous MRE distinguished seven weathering units, the 2023 MRE only used five: regolith at the surface, below which is the oxidised zone, then the transitional zone split in Upper and Lower, and finally fresh rock.
Where the 2017 MRE outlines low-grade domains using a threshold of 0.2 g/t Au over a minimum width of 3 m, this seems not to have been used in the 2023 MRE. The latest exercise uses a composite length of only 1 m for grade estimation. With the change in approach, it seems that the perceived relationship between mineralisation and lithology, something heavily criticised by Crux Investor as unproven, has been dropped. It is concerning, however, that wireframing seems to be purely based on connecting grade intercepts without any geological support. Such outlining always generates issues.
The most important change from the 2017 MRE is that the current study concedes that variography gave such poor results that ordinary kriging (“OK”), used in 2017, was not appropriate, and block grades have been estimated using Inverse Distance Cubed (“ID3”). As stated: “The Authors were unable to derive acceptable semi-variograms for the individual mineralization domains, which tended towards pure-nugget effect semi-variograms or very short range semi-variograms”. The reference to “pure nugget effect” should make one extra cautious about the results of the resource estimation.
The 2023 MRE’s tendency to greater selectivity is also evident in the choice of parent block size with dimensions of 6.25 m along strike (previously 12.5 m), 2 m across strike (previously 4 m), and 3 m height (previously 6 m).
The conceptual pit outlines use input parameters that yielded cut-off grades slightly above 0.25 g/t Au (previously 0.20 g/t Au) for free dig material and 0.45 g/t Au for material of Lower Transition zone and Fresh Rock. The increase in cut-off grade is despite assuming a much higher gold price of US$1,700/oz and reflects much more conservative operating cost assumptions.
Table 3.4_1 below shows the Mineral Resource statement, effective 28 March 2023 compared to the statement effective 5 January 2017.
The latest Measured and Indicated (“M&I”) resources contain 11% less gold than in 2017, despite the inclusion of new deposits. The drop is a reflection of resources having been mined, combined with an increase in cut-off grade. The higher cut-off grade resulted in a grade that is 13% higher than in 2017.
Not shown in the table are numbers for Inferred resources that amount to 60,000 oz in Oxide and 549,000 oz in Fresh Rock, both at roughly the same grade as for M&I resources.
The 2023 MRE presents no visual validation of the block models. This was supposedly carried out “visually by the inspection of successive vertical cross-section lines and plan views in order to confirm that the block models correctly reflect the distribution of high-grade and low-grade values”. It would have been good if the report had shown examples of close correlation. Instead, tables are included comparing the results for the mean of composite grades, OK estimated grade, nearest neighbour estimated grades, and ID3 estimated grades.
At least no longitudinal sections were presented as for the 2017 MRE onto which the individual parallel domains were projected to validate block grades with composite grades. Crux Investor was very critical of this in its Analyst’s Notes as being inappropriate.
Crux Investor deems the latest MRE a big improvement over the 2017 exercise, as it makes fewer assumptions that can be classified as leaps of faith. However, it is incomprehensible that the 2023 MRE has not tested the model against what has been mined since the start of production. This would have been the best validation of the MRE. The absence of such a reconciliation, something that mine management does as a matter of course during mining, makes one wonder whether the results were not good enough to be presented. The practice of reconciliation is confirmed on page 16.16 of the technical report, which states: “reconciliation between the resource block model, dig packets and plant results are performed monthly”.
Mineral Reserves Estimation
For the reserve estimation, pits were designed in six block areas (previously five), which are divided by river beds (indicated in light blue in Figure 3.5_1) or where there is a deposit not connected to the main body (i.e. P17 Block at the extreme right).
After using a very small block size for the MRE, the model had to be re-blocked back to a larger 12.5 m x 4 m x 6 m size “to account for dilution and losses”. Dilution rates vary between 15% and 30%. For the three most important reserve areas in order of gold content, the estimated dilutions were 23% (Block 2), 16% (Block 4), and 22% (Block 1). These dilution rates are much higher than suggested in 2019 when they varied between 1.2% and 13.7%. Ore losses for the three main reserve areas are respectively 25%, 17% and 19%.
These are substantial numbers and probably reflect the narrow nature of the individual domains.
Mining in the flood plains needs to be planned carefully to be completed in one dry season (i.e. pits in the Nobsin River), the creation of 50 m wide buffers to protect main pits, creation of upstream dams and downstream and river diversions.
For the pit optimisation, both free dig and hard rock material were included, with inputs varied depending on the proposed mining method. The input parameters used a mining cost rate of US$2.45/t for free-dig mining, adding US$0.40/t for drilling and blasting of fresh rock. With the benefit of having actual contractor rates the provisions are much more realistic than the US$1.30/t used in 2019 for free dig and US$1.75/t for fresh rock. Similarly, the processing cost rates of US$7.50/t for oxide material and US$15.25/t for fresh material are much more realistic than the US$5.30/t used in 2019 for oxide and US$11.10/t for sulphide.
The net effect of the higher gold price, but also higher operating cost, is that the calculated cut-off grades remained essentially the same at 0.3 g/t Au for oxide and transition material to 0.5 g/t Au for sulphide material.
The presence of high-water saturation zones has a large impact on the pit slopes in such areas. 33% saturation of saprolite results in overall slope angles as low as 24° by the time the pit reaches a depth of 100 m and for 10% saturation as low as 32°.
The pit design incorporated more than 76 separate pits varying from 18 m to 180 m depth along 14 km strike and 3 km wide.
Table 3.5_1 contains the mineral reserve statements, comparing the 28 March 2023 numbers to the 26 June 2019 reserves.
Total gold in reserves has increased by 25% amounting to 2.3 Moz at an average grade of 0.75 g/t Au. This is somewhat unexpected considering a decrease in gold in mineral resources. The explanation is the much higher overall conversion rate of 51% compared to 36% in 2019. Why the conversion is so much higher than before is not explained.
Whereas the 2019 reserves had an average grade of 17% higher than the M&I resources grade, the 2023 reserves have a slightly lower grade than mineral resources, which is much more reasonable considering the effect of dilution. The 2023 MRE also applies a factor of generally between 0.85 and 0.95 (for P17 a factor of 0.66 and for P16 0.50 was used!) to account for artisanal activity having removed pockets of high-grade gold.
Associated with the reserves is 187.6 Mt waste for a strip ratio of 1.96.
Mining
The Bomboré mine has been planned as a conventional open pit operation using contract mining. The oxide material can be readily excavated in situ (free‐dig material). The sulphides include the Lower Transition and Fresh Rock weathering units, which will require a varying degree of drill and blast before being loaded onto trucks. The pit design is based on 6 m benches for Oxides and double stack 2 x 6 m bench height for Fresh Rock. Ore will be excavated in 3 m flitches to increase mining selectivity. In general, a minimum mining width of 4 m is observed during the dig packet creation. According to the technical report: “packet grades are estimated using the OK gold grade estimation from the bench samples within the packet polygon”. The inconsistency between rejecting OK for resource estimation but using it for mine planning is not explained.
Mining of Oxides is currently undertaken with diesel hydraulic excavators equipped with 3 m3 to 5 m3 buckets. Similar shovels are planned for mining the Fresh Rock.
The haulage requirements for Oxide and Fresh Rock material have been estimated based on rigid frame highway trucks with 26 t payload as currently deployed in the mining operations. Using such trucks in preference to articulated dump trucks is cheaper, but gives less flexibility and productivity during the wet season and requires proper cladding of the haul roads.
Mining, backfilling, and rehabilitation of the pits within “Restricted Zones” (where water saturation is expected at 33%) is to be fully completed prior to re‐establishing river flow by the start of the next wet season.
Run of mine (“ROM”) ore will be hauled to the process plants and low-grade and medium-grade material hauled to the ore stockpiles. Waste will be hauled to waste dumps with approximately 25% used for site and Tailings Storage Facility (“TSF”) construction. Managing the five material streams will require extensive grade control measures.
The above description shows that mining will not be straightforward, requiring many small pits, excavation of relatively small heights, using relatively small mining equipment to minimise dilution, requiring many supporting activities such as grade control and construction and activities to protect pits from water ingress and cladding of haul roads. This should be reflected in the mining cost rate and sustaining capital expenditure.
Metallurgy and Processing
The oxide plant can boast a production performance of more than one year and has proven to perform as forecast with recoveries exceeding 90% at head grades above 0.80 g/t Au. Moreover, the plant has proven to be able to treat 0.7 Mtpa above its nameplate capacity of 5.2 Mtpa. This aspect of the business plan can therefore be considered low risk and will not receive further attention.
Additional test work on sulphide material was carried out in 2023 to support the updated feasibility study. Crux Investor records that the gold grade of the samples and composites used are generally representative of the reserve grade. The results confirmed previous work with one major difference. Whereas the 2019 feasibility study had gold recovery increasing with grade, the 2023 test work results found no obvious relationship between grade and recovery and suggested a fixed gold recovery rate for the various ore types: Oxide (91.8%), Upper Transitional (89%), Lower Transition (86%), and Fresh (81.7%).
However, actual recovery of treating Oxide shows a clear relationship as is illustrated in Figure 3.7_1 below.
The diagram shows that at least for Oxide there is a definite and strong relationship between grade and recovery: for every 0.1 g/t Au drop in feed grade, the recovery can be expected to drop by 1.8 percentage points.
The Sulphide Plant differs from the Oxide Plant by having a crushing circuit and using a semi-autogenous (“SAG”) mill (the Oxide Plant uses a ball mill) to produce a grind size of 80% passing (“P80”) 75 μm (Oxide Plant P80 of 125 μm). After pre-oxidation gold is subjected to carbon-in-leach (“CIL”). Liquid cyanide is pumped to the leach circuit to leach the gold. Activated carbon is used to adsorb the gold out of the slurry and loaded carbon is acid-washed and pressure-stripped in a Zadra elution circuit. The existing carbon regeneration kiln will reactivate the carbon, the existing gold room will recover gold in two new electrowinning cells and the existing furnace will produce doré bullion bars.
The Sulphide Plant will be designed for a 4.4 Mtpa throughput.
Economic Evaluation
Economic Assumptions
The spot price on 19 April 2024 of US$2,390/oz Au was used as the base case gold price for the Crux Investor valuation. In addition, the feasibility study price of US$1,750/oz was used together with all other feasibility study input parameters to check whether the Crux Investor tax model is valid.
Production Schedule
Figure 3.8.2_1 shows graphically annual mine production.
According to the technical report, for the production schedule, pits were sequenced in order of value within assorted constraints such as wet seasons, access, TSF construction, and plant ramp-up.
Production for 2023 includes only nine months as of 1 April, mostly oxide ore. The little sulphide ore that is mined will be sent to the stockpile. The sharp rise in overall mine production in 2025 reflects the start of sulphide ore treatment requiring substantial pre-stripping of waste.
Figure 3.8.2_2 shows the plant feed over time, as of 1 April 2023. Through stockpiling lower-grade material with a grade of approx. 0.3 g/t Au, the planned feed grade in the early years is higher. Processing of sulphide and lower transitional material is planned to commence in 2025, which will benefit the overall grade just as the oxide material grade is dropping.
Over the Life of Mine (“LOM”) the amount of feed to the Oxide Plant is kept constant through reclamation of stockpiled ore. Crux Investor notices that the schedule optimistically assumes that the operation will manage to draw the highest grade first. At the end of the LOM low-grade, stockpiled sulphide material will be fed to complement dropping mine production. However, Crux Investor’s modelling shows that approx. 5,560 oz less gold is treated from stockpile withdrawals than stacked.
Capital Expenditure
Table 3.8.3_1 shows the forecast capital expenditure relating to Phase II, the so-called Growth Capital Expenditure, and Sustaining Capital Expenditure over the LOM.
The capital expenditure for mining is low because the mining contractor has the obligation to refurbish and replace mining equipment.
The provision for the stand-alone new plant seems very low, at less than US$460/monthly tonne capacity, even when the costs of all other supporting activities are included. Crux Investor has raised the cost by 42% to reach US$650/t monthly capacity, which is still optimistically low.
RAP in the table refers to the Resettlement Action Plan which involves the construction of three new resettlement communities under phases 2 & 3 and another under phase 4. Why it is classified as “growth” is unclear as it is incurred to extend the LOM and should be seen as in support of sustaining operations.
Sustaining capital costs include ongoing TSF raises, haul road extensions, grade control drills, and mine dewatering and surface water management equipment.
The closure and rehabilitation activities are expected to absorb US$19.1 million, but the study assumes that US$9.9 million will be received for the sale of equipment, which is an uncertain and risky assumption.
Operating Cost Estimate
In the previous Analyst’s Notes on Orezone, Crux Investor heavily criticised the operating costs rates used as being far too low. A benchmarking exercise using similar mining operations in Burkina Faso supported an increase of 60% in total operating costs. Actual operating costs during 2023 proved to be 59% higher than forecast, validating Crux Investor’s concerns.
With the benefit of knowing the early 2023 operating cost, the 2023 feasibility study has used much more realistic rates as is shown in Table 3.8.4_1. However, these are still low compared to actual 2023 operating cost rates.
Crux Investor has used a rate of US$3.50/t mined over the LOM to recognise the fact that in the future drilling and blasting will be required.
In 2024 the mine will be fully serviced by grid power, which according to management is expected to drop power costs by US$3.0/t treated. Considering that actual oxide processing was US$10.14/t during 2023, compared to the forecast of US$4.09 + US$0.62 = US$5.71/t, the suggested rate of US$5.73 + US$0.37 = US$6.10 was raised by US$5.71 – US$3.0 power saving = US$8.81/t oxide ore treated.
Crux Investor adopted the feasibility study rate of US$13.38 + US$0.37 = US$13.75/t, assuming that the power cost savings had already been factored in.
The feasibility study assumed General and Administrative (“G&A”) expenses of US$19.8 million for 2024 increasing to US$22.2 million after the Phase II expansion is complete. These provisions look low compared to the actual 2023 expenditure of US$22.7 million. Crux Investor has assumed US$22.7 million before expansion and US$27.7 million thereafter.
The valuation has included US$7.3 million for Corporate Expenses, the amount incurred in 2023, ignored in the feasibility study.
Working Capital
As the mine is in production, this is irrelevant and is considered when calculating the Enterprise Value in Section 4.1 below.
Royalties and Taxes
As was pointed out in Section 3.2 of this report, the sliding scale royalty to the government is effectively 7% for a gold price exceeding US$2,000/oz, to which must be added another percentage point for contributions to the local development fund.
As is standard with technical reports, the discussion on taxation is almost non-existent. The corporate tax rate is 27.5%, but no information is given about amortisation and depreciation of capital expenditure. Crux Investor has allowed for these based on the unit-of-production method reducing the book value to nil by the end of LOM. On 31 December 2023, the carrying number of historical investments was US$193.2 million.
The technical report gives no information on the tax rate on expatriation of dividends, but according to an article on the internet (https://www.trade.gov/country-commercial-guides/burkina-faso-market-opportunities) dated 30 November 2022, this is 12.5%.
Financing
The government has a 10% free carried interest.
The operation is subject to servicing and repayment of several loan facilities. As these are generally of short to medium duration, Crux Investor has not modelled servicing and repayment, and will account for these obligations under the Enterprise Value of Orezone. This introduces a small distortion, as cash flow shared with the government is after debt servicing arrangements.
There is a silver stream arrangement, but this is ignored by Crux Investor as being negligible, as silver revenue were ignored in the model.
Results
Table 3.8.8_1 shows the forecast financial performance over the LOM, both as per the feasibility study and per this valuation. The feasibility study case has been modelled to check the tax model against what the feasibility study gives for total taxes. The tax model seems accurate as Crux Investor taxes are only 1.2% higher.
The reader should note that the feasibility study numbers are from 1 March 2023, and the Crux Investor valuation numbers are from 1 January 2024.
The after-tax cash flow of the feasibility study is US$32 million higher than calculated by Crux Investor. This is because the US$31 million realisation of working capital assumed by Orezone was ignored. Orezone currently has negative working capital.
Despite the much higher operating cost provided in the Crux Investor valuation, the operating cash flow is almost 44% higher due to a gold price that is 37% higher at US$2,390/oz. The cash margin is a decent 44%, much affected by the government taking 8% of revenue. The reduction in “growth and Sustaining” capital expenditure (refer to the highlighted cell in Table 3.8.8_1) is due to amounts incurred in 2023 that are not accounted for in Crux Investor cash flow as of 1 January 2024.
The Crux Investor valuation takes account of many cash outflows ignored by the feasibility study: the 10% government share; withholding taxes on the repatriation of profits; and corporate overheads. These items together reduce the net free cash flow by US$362 million.
Table 3.8.8_2 shows the sensitivity of the net present values (“NPV’s”) for various discount rates to the main input parameters.
After substantially adjusting the operating cost there is little risk that this metric will fall short. The major remaining risk associated with the project is the feed grade having been overestimated. The gold price is a rough proxy for this as both price and grade will affect the revenue. For every percentage point variance in grade, the NPV8 would vary by almost US$15 million. A 34% shortfall (i.e. a LOM grade of 0.49 g/t Au) would wipe out the NPV8.
Valuation of Orezone Gold
The Enterprise Value of Orezone Gold on 19 April 2024
At the share price of C$0.81 on 19 April 2024, the market capitalisation of Orezone is C$298 million, or US$216 million.
At the end of December 2023, the company had 20.3 million options outstanding, of which an estimated 14.1 million are in the money. On that date 2.1 million Restricted Share Units were outstanding.
On 31 December 2023, the net current assets were negative US$30.5 million, and loans amounted to US$72.4 million.
Based on the above, Orezone's diluted Enterprise Value is C$443 million, equivalent to US$322 million, as derived in Table 4.1_1.
The diluted Enterprise Value of US$322 million is almost 40% lower than the NPV8 value calculated by Crux Investor. Considering the 90% interest in Bomboré, it puts a value of US$155 on each ounce in reserves.
Corporate Cash Flow
Figure 4.2_1 shows the forecast cash flow receivable in Canada after deducting the Burkino Faso government’s share, paying taxes on the repatriation of profits, and covering corporate expenses.
The above picture is flattering, as Crux Investor did not model debt servicing and repayment, which stood on 31 December 2023 at US$92.6 million including a US$20.2 million short-term portion.
The loans include a Convertible Note Facility currently amounting to US$31.6 million, which may be serviced up to 75% by issuing shares to pay interest. The holder may elect to convert the principal at any time for shares, but this is unattractive to the issuer of the facility should the share price drop below US$1.08 (equivalent to C$1.49).
The full repayment is due before September 2026 (October 2026 for the Convertible Note Facility). Theoretically, the company would generate more than sufficient funds in 2026, but this is subject to the completion of Phase II expansion, which requires substantial investments in 2024 and 2025, much more than the current cash balance. Orezone will have to carry out a major equity raise or enter into additional loan agreements. The Management Discussion and Analysis (“MDA”) report for the year ending 31 December 2023 mentions: “the Company is in the early engineering stage of the Phase II hard rock expansion as contemplated in the 2023 FS. This expansion is planned to be fully financed through operating cashflows and additional senior debt from Coris Bank. Discussions with Coris Bank are ongoing.”
As the decision has been pushed out to later in 2024, it will be impossible to achieve the production profile in the 2023 feasibility study with feed to the Sulphide plant in 2025.
Even without the current portion of debt, the net current asset balance is negative by more than US$10 million. Thus, Orezone's balance sheet cannot be classified as robust.
Executive Summary
Orezone Gold Corporation (“Orezone”) (TSX:ORE) (OTCQZ:ORZCF) is a company that has developed the Bomboré gold project in Burkina Faso, West Africa, which declared commercial production on 1 December 2022. It has, however, not come easy. Orezone’s involvement in the project dates back to before 2006, when it was earning into the project. After 2008, Bomboré was fully owned, and Orezone could declare in that year a decent size of mineral resource amounting to 2.7 million ounces (Moz”), albeit at a very low grade of 0.60 g/t Au.
The Bomboré project was obviously not an easy nut to crack as the company continued drilling and conducting economic assessments. Updated mineral resource estimates (“MRE”) were released almost on an annual basis until 2015, after which MRE and/or feasibility studies were released on an annual basis, culminating in the 2019 feasibility study (“FS”), which was the basis for the go-ahead decision to develop the mine. Crux Investor’s position is that, if a project suddenly proves feasible after many years of plodding along, be extra careful.
For this reason, a full review and valuation was undertaken by Crux Investor early in 2023, to verify whether Bomboré made the grade. The Analyst’s Notes published on 13 January 2023 raised several concerns, in particular relating to the MRE methodology and very low assumed operating cost rates. Crux Investor had benchmarked these rates against actual costs of other open pit operations in Burkina Faso and concluded that a 60% addition to the total operating cost would bring Bomboré in line. The conclusion of the report was that, at a diluted Enterprise Value of US$475 million, it was valued 28% higher than the NPV8 value without any mishaps and therefore offered limited upside.
An Analyst’s Notes dated 23 April 2024 reviewed how the company had fared compared to the plan. This showed that Crux Investor’s concern about the cost rate was fully warranted, and that there are indications the actual grade mined is lower than forecast.
On 24 November 2023, a definitive feasibility study (“DFS”) was published on the Phase II expansion for Bomboré. This study could draw on actual production and financial performance and should give a much more reliable picture of the project’s prospects. As the market had since January 2023 pushed down the share price substantially, despite a rising gold price, Orezone may well now be a good opportunity. This is the reason for this re-evaluation.
The latest MRE is deemed by Crux Investor an improvement over previous work, as it makes fewer assumptions that can be classified as leaps of faith. However, it is incomprehensible that the 2023 MRE has not tested the model against what has been mined since the start of production. This would have been the best validation of the estimation results. According to Orezone, reconciliation is carried out routinely, and the absence of these results in the technical report is concerning.
The reserve estimation also improves the 2019 study, as it uses a higher cut-off grade and applies much higher dilution rates, plus factors to reduce the grade due to artisanal mining of high-grade pockets. Whereas there has been a considerable decline of contained gold in the mineral resources, the gold in reserves has increased by 25%. This is explained by a much higher conversion rate of resources to reserves, 51% compared to 39% in 2019. Why the conversion is so much higher than before is not explained.
Mining involves much grade control with five material streams, the use of relatively small equipment, extracting the ore in a selective fashion to reduce dilution, and employing a contractor responsible for acquiring equipment. All these factors will push the mining cost rate up.
With actual plant performance now available, the risk relating to forecast metallurgical performance of treating Oxide material has diminished considerably. There is a clear relationship between recovery and feed grade, with a drop of 0.1 g/t Au in the feed reducing recovery by 1.8%. In light of this, the conclusion from the extensive test work on the Sulphide material is that there is no relationship between feed grade and recovery is surprising.
The Crux Investor cash flow model is based on the 2023 feasibility study but has raised the suggested capital expenditure for the plant expansion by 42% and increased total operating cost rates by 22% based on actual 2023 rates. The mining cost rate was adjusted US$0.50/t upwards to account for future drilling and blasting, and the 2023 Oxide processing cost was adjusted down by US$3.0/t for power now available from the national grid. In addition, Corporate Expenses of US$7.3 million per annum were included as per the actual 2023 expenses.
Using the spot gold price of US$2,390/oz, Crux Investor arrives at a net free cash flow of US$935 million, with an NPV8 of US$535 million, considering the 10% government share, withholding taxes on repatriation of profits, and corporate expenses. At the share price of C$0.81 on 91 April 2024, the diluted Enterprise Value of Orezone is US$321 million, which is almost 40% below the NPV8 value.
At the current very high gold price Orezone has become good value should this price become a long-term phenomenon. Bomboré is a marginal operation that has only survived its first 1½ years of production due to a much higher gold price than forecast in the 2019 FS. If it had not been for this, the much higher operational costs would have killed off the project. If you are a gold bull who believes the metal will keep its current value, Orezone provides a good upside.
There are however two risks that should be considered before investing:
- It is not evident to Crux Investor that the latest MRE is valid, something the company needs to substantiate by showing that the feed grade reconciles with the block model and by disclosing in its quarterly statements a mined grade that is in line with the planned mined grade.
- And then there is the problem of securing funding for Phase II Expansion for a project in a country that has allowed the deployment of the Africa Corps, de facto successors of the Wagner Group. One has to wonder how many Western financial institutions will be prepared to get involved in a country that has turned anti-Western.
Orezone is a case of high risk for a potential decent return.
Introduction
Orezone Gold Corporation (“Orezone”) (TSX:ORE) (OTCQZ:ORZCF) is a Canadian company that operates the Bomboré mine in Burkina Faso, West Africa. The company was the subject of an Analyst’s Notes on 13 January 2023, which raised some major concerns, and the company’s share price was deemed to provide little upside. On 23 April 2024 an Analyst’s Notes article was published reviewing how accurate Crux Investor advice had been for four companies, one of which was Orezone. The review focused on how the operational and financial performance of Orezone has been compared to the plan as per the feasibility study published in January 2020. In November 2023 a revised feasibility study was published that addressed some of Crux Investor’s concerns. This Crux Investor report reviews the updated plan and re-values Orezone to determine whether the company now constitutes good value after the drop in share price since January 2023. This report will repeat some of the background to allow the reader to assess the report as a stand-alone document.
The review of the operational and financial performance compared to the 2020 feasibility study forecast carried out for the abovementioned Analyst’s Notes published on 23 April 2024 concluded the following:
- Ore production exceeded the planned rate by almost 19%, but mine production was 7% down overall because of much lower waste stripping. Lower stripping could be planned, but also unplanned, with management not being able to properly distinguish between waste and ore, sending more waste for treatment than planned;
- The amount of material treated exceeded the plan by more than 10%, but the grade was almost 17% lower;
- The 2023 actual operating cost rate is almost exactly 60% higher, but the individual cost rates are even higher. That these much higher rates are not reflected in the overall cost rate is due to lower mining volumes and the higher treatment rate;
- Thanks to the actual gold price received exceeding forecast by 50%, revenue was 35% higher than forecast. Due to the much higher operating cost, off-site corporate cost, and ongoing exploration and evaluation costs being ignored in the feasibility study, cash flow generated from operations was 18% lower than forecast;
- However, the free cash flow was almost 90% lower than the forecast US$89 million because of much higher continued capital expenditure, and servicing of debt finance not modelled in the feasibility study.
Figure 1_1 shows Orezone's share price performance on the Toronto Stock Exchange since July 2018, the farthest back prices are available.
The graph shows that the price briefly rose after the Analyst’s Notes publication in January 2023, when the company reported good performance for the period ending December 2022. Since then, the price has dropped considerably, with the market obviously disappointed about continued poor/underperformance and possibly the increased political risk in Burkina Faso.
This note will investigate whether the share price drop has made Orezone an attractive investment opportunity based on the prospects painted in the 2023 Phase II Expansion DFS, and the current high gold price.
Historical Financial Performance
Table 2_1 gives the historical financial performance from 1 January 2010, the year when it raised substantial funding to advance Bomboré, until 31 December 2024.
Table 2_1 shows that:
- The company’s investments were initially very low, which is due to Orezone expensing exploration and evaluation costs, only to capitalise these when the project on which these expenses were incurred proved to be technically feasible and commercially viable. After the go-ahead decision, development costs were included under Investments;
- Between 1 January 2010 Orezone and 31 December 2022, just after the start of commercial production, Orezone had spent a total of US$324 million funding management, exploration activities and studies, and on investments. Net funding raised amounted to US$330 million, initially almost exclusively from equity placements until construction financing was arranged. Shareholders have funded the company until December 2023 by more than US$242 million; and
- It is noticeable that the cash balance has increased by only US$10.3 million during 2023, a year that should have been a banner year, allowing the company to generate funding for the planned Phase II expansion. The small increase is partially due to the repayment of US$29.3 million in debt, leaving US$95.5 million repayable on 31 December 2023.
Valuation of the Bomboré Project
Introduction
The technical information referred to in this report is from the NI.43-101 compliant technical report on the resource estimation by Roscoe Postle Associates Incorporated (“RPA”), the feasibility study dated 6 January 2020, and the DFS dated 24 November 2023 under the auspices of Lycopodium.
Crux Investor applauds Orezone for using different authors for the latest feasibility study. It was one of the concerns expressed in the January 2023 Analyst’s Notes that the company used the same agency for the studies, which is cost-efficient, but at the price for Orezone of nobody ever looking at the project with fresh views and ideas. Whereas the agencies remain the same, the personalities have changed at least.
Background to the Bomboré Project
The Bomboré project is located in central Burkina Faso, approximately 85 km east of the capital city of Quagadougo (Figure 3.2_1).
The project is easily accessible from Ouagadougou via the paved, national N4 highway.
The tenement covers an area of 12,963 hectares (“ha”) and consists of one Industrial Operating Permit (the Bomboré Mining Permit) of 2,887 ha, surrounded by four Mining Exploration Permits, being permit area Bomboré II of 1,265 ha, Bomboré III of 3,360 ha, Bomboré IV of 833 ha, and Bomboré IV of 4,618 ha (see outline and extent of permits in Figure 3.2_2).
Orezone has a beneficial 90% interest in the company holding the permits, with the Burkina Faso government holding the balance on a free-carried basis.
There are no royalty obligations to private third parties, but as of October 2023, the government is entitled to 6.5% net smelter return (“NSR”) when the gold price exceeds US$1,700/oz, increasing to 7.0% for spot prices exceeding US$2,000/oz. In addition, there is a contribution of 1% to a Local Development Fund.
Furthermore, in January 2024, the Burkina Faso government introduced a special levy of 2% on after-tax profits, effective beginning for the 2023 taxation year, to raise additional funds to support its efforts in improving national security.
Geology and Mineralisation
The project covers part of a northeast-southwest-trending greenstone belt extending 50 km from the southwest corner to the northeast (see Figure 3.3_1).
The permit area is underlain mainly by a metasedimentary flysch-type (= sediments deposited on the slopes of the continental shelf) sequence dominated by metasandstones with subordinate carbonaceous metapelites (= originally clay-rich) and polymictic metaconglomerates. The metasedimentary successions have been intruded by various types of igneous rocks.
Surface weathering has affected the rocks to an average depth of 35 m to 50 m, but can be as deep as 100 m, and as shallow as 5 m to 10 m. With no surface outcrop, exploration had to rely on geochemical soil sampling, geophysical surveys, and drilling, to clarify the geology and test the mineralisation.
Figure 3.3_1 shows the extent of the Bomboré shear zone (“BSZ”) within two interrupted lines in between which the mineralisation is present, with the resource shells shown as red outlines. The BSZ is a major 1-3-kilometre-wide structure and represents the dominant structural feature of the area. The BSZ is oriented 040° in the northern portion of the property and 340° in the southern portion of the property. The curvature of this shear zone is interpreted to be caused by the moulding of the greenstone belt to the late quartz-diorite intrusive that is located along the eastern margin of the property. The dip of the main lithological contacts in the north is approximately 65° towards the southeast, and in the south, approximately 55° towards the northeast. Within the shear zone, there are many indications of brittle-ductile deformation with folds, transposition, and an anastomosing pattern. From the discussion above, one can expect complex geology and deposit outlines.
The Bomboré gold mineralisation trend is defined by a gold-in-soil anomaly exceeding 0.1 g/t Au, as well as by the presence of numerous gold showings and orpaillage (artisanal miners) sites. The Bomboré anomaly measures 14 km in length, is several hundred metres in width, and occurs within the BSZ. Eleven separate auriferous zones have been delineated by drilling within the 14 km segment of the BSZ located within the project area. The gold deposits were discovered by tracing gold-in-soil anomalies to bedrock by drilling.
The gold mineralisation on the property is associated with arrays of structurally controlled quartz veins and veinlets, and associated silica, sulphide, and carbonate alteration developed within the BSZ. Most quartz veins are oriented sub-parallel to the foliation (= plane defined by with layering of minerals perpendicular to the main stress) and exhibit strong strain (= amount of deformation). The quartz veins and veinlets represent about 1% to 2% of the volume of the BSZ. The widths of the veins range from 2 cm to 1 m, with an average of 10 cm. The near-surface gold mineralisation with grades of up to 0.2 g/t Au is pervasive, regardless of quartz veining. In fresh rock, the gold mineralisation is associated with finely disseminated sulphides, predominantly pyrite. Most of the quartz vein material is barren.
When the gold mineralisation is predominantly associated with silica and iron carbonateit is typically free-milling. Gold mineralisation may, however, also be associated with disseminated sulphides (pyrite (FeS2), pyrrhotite (FeS), chalcopyrite (CuFeS2), and arsenopyrite (FeAsS)) in strongly deformed alteration zones. In this case, gold may be free milling, but can also be locked in the sulphide lattice structure and refractory (= not accessible for leaching by cyanide).
The wet palaeoclimate that preceded the current semi-arid climate in Burkina Faso has resulted in extensive surface oxidation of bedrock, and a deep weathering profile. Oxidised bedrock can occur up to a vertical depth of 100 m. Gold deposits span both the surface oxide zone and a deeper sulphide zone. In the oxide zone, gold typically occurs in a free milling form, but is grind sensitive in the sulphide zone.
At a threshold grade of approximately 0.15 g/t Au (Crux Investor comment: previously the threshold was given as 0.20 g/t Au), it is said that the gold mineralisation exhibits “reasonable continuity over a strike length of approximately 10 km”. At this threshold grade, the gold mineralisation forms more restricted corridors (500 m to 1,000 m in length and 10 m to 100 m in width) defining anastomosing patterns, parallel and slightly oblique to the general trend of the BSZ. These higher-grade corridors formed the basis for defining geostatistical domains within each litho-domain considered for mineral resource estimation.
Mineral Resources Estimation
The gold mineralisation has been modelled within seven zones (B1, B2, P11, Siga, S16, P17N, and P17) as 378 individual mineralised domains. The domains occur as sub‐parallel, tabular zones that gradually change in strike from north‐northwest, to northeast. Most of the mineralisation wireframes are interpreted to dip moderately to the east or southeast. The technical report does not discuss how these wireframes were generated, stating only that these were supplied by Orezone staff. Crux Investor considers it imprudent for the resource modeller to rely on the company to provide wireframes. He/she should generate these and only cross-check them against the company-provided ones.
Crux Investor records that Orezone has changed the denomination of certain zones and added two more since the previous MRE.
The approach to estimating resources has changed markedly from the 2017 MRE. Where the previous MRE distinguished seven weathering units, the 2023 MRE only used five: regolith at the surface, below which is the oxidised zone, then the transitional zone split in Upper and Lower, and finally fresh rock.
Where the 2017 MRE outlines low-grade domains using a threshold of 0.2 g/t Au over a minimum width of 3 m, this seems not to have been used in the 2023 MRE. The latest exercise uses a composite length of only 1 m for grade estimation. With the change in approach, it seems that the perceived relationship between mineralisation and lithology, something heavily criticised by Crux Investor as unproven, has been dropped. It is concerning, however, that wireframing seems to be purely based on connecting grade intercepts without any geological support. Such outlining always generates issues.
The most important change from the 2017 MRE is that the current study concedes that variography gave such poor results that ordinary kriging (“OK”), used in 2017, was not appropriate, and block grades have been estimated using Inverse Distance Cubed (“ID3”). As stated: “The Authors were unable to derive acceptable semi-variograms for the individual mineralization domains, which tended towards pure-nugget effect semi-variograms or very short range semi-variograms”. The reference to “pure nugget effect” should make one extra cautious about the results of the resource estimation.
The 2023 MRE’s tendency to greater selectivity is also evident in the choice of parent block size with dimensions of 6.25 m along strike (previously 12.5 m), 2 m across strike (previously 4 m), and 3 m height (previously 6 m).
The conceptual pit outlines use input parameters that yielded cut-off grades slightly above 0.25 g/t Au (previously 0.20 g/t Au) for free dig material and 0.45 g/t Au for material of Lower Transition zone and Fresh Rock. The increase in cut-off grade is despite assuming a much higher gold price of US$1,700/oz and reflects much more conservative operating cost assumptions.
Table 3.4_1 below shows the Mineral Resource statement, effective 28 March 2023 compared to the statement effective 5 January 2017.
The latest Measured and Indicated (“M&I”) resources contain 11% less gold than in 2017, despite the inclusion of new deposits. The drop is a reflection of resources having been mined, combined with an increase in cut-off grade. The higher cut-off grade resulted in a grade that is 13% higher than in 2017.
Not shown in the table are numbers for Inferred resources that amount to 60,000 oz in Oxide and 549,000 oz in Fresh Rock, both at roughly the same grade as for M&I resources.
The 2023 MRE presents no visual validation of the block models. This was supposedly carried out “visually by the inspection of successive vertical cross-section lines and plan views in order to confirm that the block models correctly reflect the distribution of high-grade and low-grade values”. It would have been good if the report had shown examples of close correlation. Instead, tables are included comparing the results for the mean of composite grades, OK estimated grade, nearest neighbour estimated grades, and ID3 estimated grades.
At least no longitudinal sections were presented as for the 2017 MRE onto which the individual parallel domains were projected to validate block grades with composite grades. Crux Investor was very critical of this in its Analyst’s Notes as being inappropriate.
Crux Investor deems the latest MRE a big improvement over the 2017 exercise, as it makes fewer assumptions that can be classified as leaps of faith. However, it is incomprehensible that the 2023 MRE has not tested the model against what has been mined since the start of production. This would have been the best validation of the MRE. The absence of such a reconciliation, something that mine management does as a matter of course during mining, makes one wonder whether the results were not good enough to be presented. The practice of reconciliation is confirmed on page 16.16 of the technical report, which states: “reconciliation between the resource block model, dig packets and plant results are performed monthly”.
Mineral Reserves Estimation
For the reserve estimation, pits were designed in six block areas (previously five), which are divided by river beds (indicated in light blue in Figure 3.5_1) or where there is a deposit not connected to the main body (i.e. P17 Block at the extreme right).
After using a very small block size for the MRE, the model had to be re-blocked back to a larger 12.5 m x 4 m x 6 m size “to account for dilution and losses”. Dilution rates vary between 15% and 30%. For the three most important reserve areas in order of gold content, the estimated dilutions were 23% (Block 2), 16% (Block 4), and 22% (Block 1). These dilution rates are much higher than suggested in 2019 when they varied between 1.2% and 13.7%. Ore losses for the three main reserve areas are respectively 25%, 17% and 19%.
These are substantial numbers and probably reflect the narrow nature of the individual domains.
Mining in the flood plains needs to be planned carefully to be completed in one dry season (i.e. pits in the Nobsin River), the creation of 50 m wide buffers to protect main pits, creation of upstream dams and downstream and river diversions.
For the pit optimisation, both free dig and hard rock material were included, with inputs varied depending on the proposed mining method. The input parameters used a mining cost rate of US$2.45/t for free-dig mining, adding US$0.40/t for drilling and blasting of fresh rock. With the benefit of having actual contractor rates the provisions are much more realistic than the US$1.30/t used in 2019 for free dig and US$1.75/t for fresh rock. Similarly, the processing cost rates of US$7.50/t for oxide material and US$15.25/t for fresh material are much more realistic than the US$5.30/t used in 2019 for oxide and US$11.10/t for sulphide.
The net effect of the higher gold price, but also higher operating cost, is that the calculated cut-off grades remained essentially the same at 0.3 g/t Au for oxide and transition material to 0.5 g/t Au for sulphide material.
The presence of high-water saturation zones has a large impact on the pit slopes in such areas. 33% saturation of saprolite results in overall slope angles as low as 24° by the time the pit reaches a depth of 100 m and for 10% saturation as low as 32°.
The pit design incorporated more than 76 separate pits varying from 18 m to 180 m depth along 14 km strike and 3 km wide.
Table 3.5_1 contains the mineral reserve statements, comparing the 28 March 2023 numbers to the 26 June 2019 reserves.
Total gold in reserves has increased by 25% amounting to 2.3 Moz at an average grade of 0.75 g/t Au. This is somewhat unexpected considering a decrease in gold in mineral resources. The explanation is the much higher overall conversion rate of 51% compared to 36% in 2019. Why the conversion is so much higher than before is not explained.
Whereas the 2019 reserves had an average grade of 17% higher than the M&I resources grade, the 2023 reserves have a slightly lower grade than mineral resources, which is much more reasonable considering the effect of dilution. The 2023 MRE also applies a factor of generally between 0.85 and 0.95 (for P17 a factor of 0.66 and for P16 0.50 was used!) to account for artisanal activity having removed pockets of high-grade gold.
Associated with the reserves is 187.6 Mt waste for a strip ratio of 1.96.
Mining
The Bomboré mine has been planned as a conventional open pit operation using contract mining. The oxide material can be readily excavated in situ (free‐dig material). The sulphides include the Lower Transition and Fresh Rock weathering units, which will require a varying degree of drill and blast before being loaded onto trucks. The pit design is based on 6 m benches for Oxides and double stack 2 x 6 m bench height for Fresh Rock. Ore will be excavated in 3 m flitches to increase mining selectivity. In general, a minimum mining width of 4 m is observed during the dig packet creation. According to the technical report: “packet grades are estimated using the OK gold grade estimation from the bench samples within the packet polygon”. The inconsistency between rejecting OK for resource estimation but using it for mine planning is not explained.
Mining of Oxides is currently undertaken with diesel hydraulic excavators equipped with 3 m3 to 5 m3 buckets. Similar shovels are planned for mining the Fresh Rock.
The haulage requirements for Oxide and Fresh Rock material have been estimated based on rigid frame highway trucks with 26 t payload as currently deployed in the mining operations. Using such trucks in preference to articulated dump trucks is cheaper, but gives less flexibility and productivity during the wet season and requires proper cladding of the haul roads.
Mining, backfilling, and rehabilitation of the pits within “Restricted Zones” (where water saturation is expected at 33%) is to be fully completed prior to re‐establishing river flow by the start of the next wet season.
Run of mine (“ROM”) ore will be hauled to the process plants and low-grade and medium-grade material hauled to the ore stockpiles. Waste will be hauled to waste dumps with approximately 25% used for site and Tailings Storage Facility (“TSF”) construction. Managing the five material streams will require extensive grade control measures.
The above description shows that mining will not be straightforward, requiring many small pits, excavation of relatively small heights, using relatively small mining equipment to minimise dilution, requiring many supporting activities such as grade control and construction and activities to protect pits from water ingress and cladding of haul roads. This should be reflected in the mining cost rate and sustaining capital expenditure.
Metallurgy and Processing
The oxide plant can boast a production performance of more than one year and has proven to perform as forecast with recoveries exceeding 90% at head grades above 0.80 g/t Au. Moreover, the plant has proven to be able to treat 0.7 Mtpa above its nameplate capacity of 5.2 Mtpa. This aspect of the business plan can therefore be considered low risk and will not receive further attention.
Additional test work on sulphide material was carried out in 2023 to support the updated feasibility study. Crux Investor records that the gold grade of the samples and composites used are generally representative of the reserve grade. The results confirmed previous work with one major difference. Whereas the 2019 feasibility study had gold recovery increasing with grade, the 2023 test work results found no obvious relationship between grade and recovery and suggested a fixed gold recovery rate for the various ore types: Oxide (91.8%), Upper Transitional (89%), Lower Transition (86%), and Fresh (81.7%).
However, actual recovery of treating Oxide shows a clear relationship as is illustrated in Figure 3.7_1 below.
The diagram shows that at least for Oxide there is a definite and strong relationship between grade and recovery: for every 0.1 g/t Au drop in feed grade, the recovery can be expected to drop by 1.8 percentage points.
The Sulphide Plant differs from the Oxide Plant by having a crushing circuit and using a semi-autogenous (“SAG”) mill (the Oxide Plant uses a ball mill) to produce a grind size of 80% passing (“P80”) 75 μm (Oxide Plant P80 of 125 μm). After pre-oxidation gold is subjected to carbon-in-leach (“CIL”). Liquid cyanide is pumped to the leach circuit to leach the gold. Activated carbon is used to adsorb the gold out of the slurry and loaded carbon is acid-washed and pressure-stripped in a Zadra elution circuit. The existing carbon regeneration kiln will reactivate the carbon, the existing gold room will recover gold in two new electrowinning cells and the existing furnace will produce doré bullion bars.
The Sulphide Plant will be designed for a 4.4 Mtpa throughput.
Economic Evaluation
Economic Assumptions
The spot price on 19 April 2024 of US$2,390/oz Au was used as the base case gold price for the Crux Investor valuation. In addition, the feasibility study price of US$1,750/oz was used together with all other feasibility study input parameters to check whether the Crux Investor tax model is valid.
Production Schedule
Figure 3.8.2_1 shows graphically annual mine production.
According to the technical report, for the production schedule, pits were sequenced in order of value within assorted constraints such as wet seasons, access, TSF construction, and plant ramp-up.
Production for 2023 includes only nine months as of 1 April, mostly oxide ore. The little sulphide ore that is mined will be sent to the stockpile. The sharp rise in overall mine production in 2025 reflects the start of sulphide ore treatment requiring substantial pre-stripping of waste.
Figure 3.8.2_2 shows the plant feed over time, as of 1 April 2023. Through stockpiling lower-grade material with a grade of approx. 0.3 g/t Au, the planned feed grade in the early years is higher. Processing of sulphide and lower transitional material is planned to commence in 2025, which will benefit the overall grade just as the oxide material grade is dropping.
Over the Life of Mine (“LOM”) the amount of feed to the Oxide Plant is kept constant through reclamation of stockpiled ore. Crux Investor notices that the schedule optimistically assumes that the operation will manage to draw the highest grade first. At the end of the LOM low-grade, stockpiled sulphide material will be fed to complement dropping mine production. However, Crux Investor’s modelling shows that approx. 5,560 oz less gold is treated from stockpile withdrawals than stacked.
Capital Expenditure
Table 3.8.3_1 shows the forecast capital expenditure relating to Phase II, the so-called Growth Capital Expenditure, and Sustaining Capital Expenditure over the LOM.
The capital expenditure for mining is low because the mining contractor has the obligation to refurbish and replace mining equipment.
The provision for the stand-alone new plant seems very low, at less than US$460/monthly tonne capacity, even when the costs of all other supporting activities are included. Crux Investor has raised the cost by 42% to reach US$650/t monthly capacity, which is still optimistically low.
RAP in the table refers to the Resettlement Action Plan which involves the construction of three new resettlement communities under phases 2 & 3 and another under phase 4. Why it is classified as “growth” is unclear as it is incurred to extend the LOM and should be seen as in support of sustaining operations.
Sustaining capital costs include ongoing TSF raises, haul road extensions, grade control drills, and mine dewatering and surface water management equipment.
The closure and rehabilitation activities are expected to absorb US$19.1 million, but the study assumes that US$9.9 million will be received for the sale of equipment, which is an uncertain and risky assumption.
Operating Cost Estimate
In the previous Analyst’s Notes on Orezone, Crux Investor heavily criticised the operating costs rates used as being far too low. A benchmarking exercise using similar mining operations in Burkina Faso supported an increase of 60% in total operating costs. Actual operating costs during 2023 proved to be 59% higher than forecast, validating Crux Investor’s concerns.
With the benefit of knowing the early 2023 operating cost, the 2023 feasibility study has used much more realistic rates as is shown in Table 3.8.4_1. However, these are still low compared to actual 2023 operating cost rates.
Crux Investor has used a rate of US$3.50/t mined over the LOM to recognise the fact that in the future drilling and blasting will be required.
In 2024 the mine will be fully serviced by grid power, which according to management is expected to drop power costs by US$3.0/t treated. Considering that actual oxide processing was US$10.14/t during 2023, compared to the forecast of US$4.09 + US$0.62 = US$5.71/t, the suggested rate of US$5.73 + US$0.37 = US$6.10 was raised by US$5.71 – US$3.0 power saving = US$8.81/t oxide ore treated.
Crux Investor adopted the feasibility study rate of US$13.38 + US$0.37 = US$13.75/t, assuming that the power cost savings had already been factored in.
The feasibility study assumed General and Administrative (“G&A”) expenses of US$19.8 million for 2024 increasing to US$22.2 million after the Phase II expansion is complete. These provisions look low compared to the actual 2023 expenditure of US$22.7 million. Crux Investor has assumed US$22.7 million before expansion and US$27.7 million thereafter.
The valuation has included US$7.3 million for Corporate Expenses, the amount incurred in 2023, ignored in the feasibility study.
Working Capital
As the mine is in production, this is irrelevant and is considered when calculating the Enterprise Value in Section 4.1 below.
Royalties and Taxes
As was pointed out in Section 3.2 of this report, the sliding scale royalty to the government is effectively 7% for a gold price exceeding US$2,000/oz, to which must be added another percentage point for contributions to the local development fund.
As is standard with technical reports, the discussion on taxation is almost non-existent. The corporate tax rate is 27.5%, but no information is given about amortisation and depreciation of capital expenditure. Crux Investor has allowed for these based on the unit-of-production method reducing the book value to nil by the end of LOM. On 31 December 2023, the carrying number of historical investments was US$193.2 million.
The technical report gives no information on the tax rate on expatriation of dividends, but according to an article on the internet (https://www.trade.gov/country-commercial-guides/burkina-faso-market-opportunities) dated 30 November 2022, this is 12.5%.
Financing
The government has a 10% free carried interest.
The operation is subject to servicing and repayment of several loan facilities. As these are generally of short to medium duration, Crux Investor has not modelled servicing and repayment, and will account for these obligations under the Enterprise Value of Orezone. This introduces a small distortion, as cash flow shared with the government is after debt servicing arrangements.
There is a silver stream arrangement, but this is ignored by Crux Investor as being negligible, as silver revenue were ignored in the model.
Results
Table 3.8.8_1 shows the forecast financial performance over the LOM, both as per the feasibility study and per this valuation. The feasibility study case has been modelled to check the tax model against what the feasibility study gives for total taxes. The tax model seems accurate as Crux Investor taxes are only 1.2% higher.
The reader should note that the feasibility study numbers are from 1 March 2023, and the Crux Investor valuation numbers are from 1 January 2024.
The after-tax cash flow of the feasibility study is US$32 million higher than calculated by Crux Investor. This is because the US$31 million realisation of working capital assumed by Orezone was ignored. Orezone currently has negative working capital.
Despite the much higher operating cost provided in the Crux Investor valuation, the operating cash flow is almost 44% higher due to a gold price that is 37% higher at US$2,390/oz. The cash margin is a decent 44%, much affected by the government taking 8% of revenue. The reduction in “growth and Sustaining” capital expenditure (refer to the highlighted cell in Table 3.8.8_1) is due to amounts incurred in 2023 that are not accounted for in Crux Investor cash flow as of 1 January 2024.
The Crux Investor valuation takes account of many cash outflows ignored by the feasibility study: the 10% government share; withholding taxes on the repatriation of profits; and corporate overheads. These items together reduce the net free cash flow by US$362 million.
Table 3.8.8_2 shows the sensitivity of the net present values (“NPV’s”) for various discount rates to the main input parameters.
After substantially adjusting the operating cost there is little risk that this metric will fall short. The major remaining risk associated with the project is the feed grade having been overestimated. The gold price is a rough proxy for this as both price and grade will affect the revenue. For every percentage point variance in grade, the NPV8 would vary by almost US$15 million. A 34% shortfall (i.e. a LOM grade of 0.49 g/t Au) would wipe out the NPV8.
Valuation of Orezone Gold
The Enterprise Value of Orezone Gold on 19 April 2024
At the share price of C$0.81 on 19 April 2024, the market capitalisation of Orezone is C$298 million, or US$216 million.
At the end of December 2023, the company had 20.3 million options outstanding, of which an estimated 14.1 million are in the money. On that date 2.1 million Restricted Share Units were outstanding.
On 31 December 2023, the net current assets were negative US$30.5 million, and loans amounted to US$72.4 million.
Based on the above, Orezone's diluted Enterprise Value is C$443 million, equivalent to US$322 million, as derived in Table 4.1_1.
The diluted Enterprise Value of US$322 million is almost 40% lower than the NPV8 value calculated by Crux Investor. Considering the 90% interest in Bomboré, it puts a value of US$155 on each ounce in reserves.
Corporate Cash Flow
Figure 4.2_1 shows the forecast cash flow receivable in Canada after deducting the Burkino Faso government’s share, paying taxes on the repatriation of profits, and covering corporate expenses.
The above picture is flattering, as Crux Investor did not model debt servicing and repayment, which stood on 31 December 2023 at US$92.6 million including a US$20.2 million short-term portion.
The loans include a Convertible Note Facility currently amounting to US$31.6 million, which may be serviced up to 75% by issuing shares to pay interest. The holder may elect to convert the principal at any time for shares, but this is unattractive to the issuer of the facility should the share price drop below US$1.08 (equivalent to C$1.49).
The full repayment is due before September 2026 (October 2026 for the Convertible Note Facility). Theoretically, the company would generate more than sufficient funds in 2026, but this is subject to the completion of Phase II expansion, which requires substantial investments in 2024 and 2025, much more than the current cash balance. Orezone will have to carry out a major equity raise or enter into additional loan agreements. The Management Discussion and Analysis (“MDA”) report for the year ending 31 December 2023 mentions: “the Company is in the early engineering stage of the Phase II hard rock expansion as contemplated in the 2023 FS. This expansion is planned to be fully financed through operating cashflows and additional senior debt from Coris Bank. Discussions with Coris Bank are ongoing.”
As the decision has been pushed out to later in 2024, it will be impossible to achieve the production profile in the 2023 feasibility study with feed to the Sulphide plant in 2025.
Even without the current portion of debt, the net current asset balance is negative by more than US$10 million. Thus, Orezone's balance sheet cannot be classified as robust.
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